Meaning
A percentage surcharge added to the raw cost of components covers the overhead of procurement and inventory management. The bill of materials markup allows a manufacturer to account for the risk of carrying stock and the administrative effort of sourcing parts from multiple vendors. It is a standard element of a manufacturing services agreement.
Management Overhead
Warehousing and logistical handling require capital and space that are not captured in the base price of a chip or a board. A bill of materials markup provides the funds necessary to maintain a secure supply chain and manage the logistics of incoming freight. This fee scales with the total value of the parts list rather than the physical size of the components.
Procurement Margin
Suppliers often add this percentage to protect their profit when component prices are volatile in the open market. The bill of materials markup remains a point of negotiation during the contract phase because it affects the final landed cost of the product.
Financial Variance
Discrepancies between the estimated and actual component prices can lead to adjustments in the total bill. A fixed bill of materials markup ensures that the manufacturer maintains a consistent return on the effort of managing thousands of individual items. It simplifies the accounting process for both the buyer and the seller.
Periodic reviews of these margins help maintain a competitive pricing structure.
