Understanding EMS Price Variances

How much should you expect prices to vary between EMS companies? The answer is about 5 percent.

EMS companies use a pricing method called cost plus. This method takes an estimate of costs to build a PCBA and adds an amount for profit. When comparing price quotes you should focus on just two things, material cost and the final price. The other elements of a price quote (labor, overhead, material overhead, corporate overhead, profit, etc.) are presented very subjectively and should be lumped together and called "transformation costs".

Since all contract manufacturing companies use cost plus, variations in the quoted prices are usually due to small and inevitable variations in the cost estimate. If you compare quotes from several CMs, you will usually see prices cluster around a certain level. This level is usually +/- 5 percent from the middle of this cluster. When you see this, be confident you have found the market level for that product. Most CMs realize their prices are based on cost estimates, which are only so accurate and they are therefore more than willing to adjust prices based on guidance from the OEM.

Similarly, if you use should cost analysis to estimate the cost of your product you should see CM prices that are within 5% of your estimate. If you receive a quote that is not within 5% you should quote another CM. If you receive several quotes that are similar but not within 5% of your should cost estimate, you may need to tune your should cost model.

Prices that vary from the market cluster or should cost by between 10–20 percent are most likely a reflection that this particular product is not well suited to the capabilities of that particular contract manufacturer, resulting in higher costs. For example, a PCBA with lots of through-hole requirements will be expensive at a CM that does not have automated equipment for through-hole soldering. A 10-20% price variance can also reflect a CM that is somewhat interested in your business, but not interested enough to put their most competitive foot forward.

Often prices vary by 20 percent or more. Usually this is the result of an error in cost estimation, and the error is probably related to material cost. It would be best to contact them and attempt to reconcile the material cost, there is likely an understandable mistake. If a contract manufacturer is 20 percent from the average quote, and you verify the material cost they used is correct, this is a CM that does not want or is very poorly suited to your business (see our article here regarding the best sized CM for your project).