What is Contract Manufacturing?

Contract manufacturing is when a company hires a third-party manufacturer to make their product (or parts of it) based on their specifications. When you hire a contract manufacturer, you will retain ownership of the product's design, its branding, and the units that are produced. The manufacturer will be the one to supply the equipment and labor needed to make the product, the expertise to oversee the manufacturing process, and, in most cases, the raw materials as well.

Contract manufacturing is used for a wide range of production types. This includes very simple jobs (like producing a single machined bushing) and more complex ones where the manufacturer delivers a fully assembled product that has been tested, certified, and packaged for retail.

For an arrangement to count as contract manufacturing, there simply needs to be a client deciding what gets built and a third party that manufactures it for them.

In this article, we'll go over the different types of contract manufacturing and what you should consider when hiring a contract manufacturer.

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How Does Contract Manufacturing Work?

1. Request for quotation (RFQ). You send the drawings, a 3D model, a sample, or some combination of these to manufacturers so they can provide you with quotes for the finished product. If the price deviates significantly from the quote, it's usually because the documentation you provided was incomplete.
2. Design for manufacturability (DFM) review. Once the manufacturer has received your design, they check it to ensure it is actually feasible. This is where they can flag potential issues like a bend radius that won't hold or a material grade that would cost three times as much as a comparable alternative. While some manufacturers do this as a single step, Komaspec runs DFM review during multiple rounds, starting at RFQ, then at the drawing stage, and again at the sample stage.
3. Drawing release and purchase order. Here, the design and its specifications are frozen and treated as final. Any changes you want to make to the drawing at this stage will cost you money (and changes to parts that have already been tooled will cost a lot). Before getting to this step, make sure to specify (in writing) that the design should remain yours and whether the tooling should belong to you or the manufacturer (including where the tool is stored and who is responsible for maintaining it). Doing this before anything gets locked in will save you headaches and potential problems down the line.
4. Tooling and first-off samples. With the design finalized, the manufacturer then builds the customized equipment needed to make your part, such as injection molds, die-cast dies, and progressive stamping dies. Once these have been made, a small run of sample parts is created to ensure the dimensions match those specified in your design.
5. Engineering prototype. If the first sample parts clear, the manufacturer then produces a run of prototype parts. These samples go through the full production process, including waterproofing, fit, finishing, and function testing to ensure the parts come out exactly as intended.
6. Pilot run. A short run of parts (at Komaspec, it's typically 20 to 100 units) on production tooling with the people that will be involved in the full production run. This is meant to surface issues that might only show up during a full production run, like problems with the assembly sequence, fixture design, cycle time, or yield. This is a core step for new product introduction.
7. Mass production. Full volume production run, with inspection built into the line so defects or issues can be caught early instead of only being noticed after all the parts have already been made.

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What Are the Types of Contract Manufacturing?

There are six different types of contract manufacturing, based on how much of the physical production work the manufacturer takes on.

• Component and part manufacturing. Under this arrangement, individual parts are made based on drawings you supply, then are shipped to you or to another third party for assembly. This is often suitable for companies that need a part they can't produce in-house or when the production volumes are too low to justify investing in the equipment.
• Sub-assembly manufacturing. This is similar to component manufacturing, except the manufacturer is contracted to produce a module or component that includes multiple parts (e.g., a welded frame, a cable harness, a populated enclosure). Aerospace and heavy equipment companies rely on this because some of the sub-assemblies they use require fixtures and skills that are only worth developing if you build them constantly.
• Contract assembly. Here, a manufacturer assembles components that have been made by another company. This is useful in cases where assembly is the hardest part of making a product. For instance, parts with awkward geometry, heavy items, or sequences that require custom jigs.
• Full-product manufacturing. This is where the manufacturer will handle the entire build. They will be responsible for the materials, fabrication, assembly, testing, and packaging. Then, they ship the finished build to you, your distributor, or straight to your customer under a drop-shipping arrangement.
• Turnkey manufacturing. This includes everything from full-product manufacturing, plus all the surrounding work. So the manufacturer will handle not only production, but design finalization, sourcing, quality assurance, certification support, and packaging design. This term gets used loosely, so make sure to ask what a supplier actually includes as part of their "turnkey manufacturing" before agreeing to move forward with them.
• Contract packaging (co-packing). A contractor packages a product it did not make or assemble. This is common in jurisdictions where packaging is regulated.

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What Types of Contract Manufacturer Are There?

There are five different types of contract manufacturers, depending on who owns the design and whose name goes on the product. There is some overlap among them, and the same factory can operate in several of these modes.

• Contract manufacturer (CM). A CM is a generalist. You provide them with the design, and they will build a custom process that works for it. This model is preferable for genuinely new products, where none of the off-the-shelf tools or parts are close enough to meet your needs.
• Original equipment manufacturer (OEM). An OEM is a manufacturer that specializes in a specific category. They have the equipment and process knowledge to make certain types of products, but you will supply the design for them to use. One thing to note here is that the term "OEM" can be used to refer either to a type of manufacturer or a brand whose products are made under an OEM arrangement. To avoid confusion, make sure the contract specifies exactly what you mean by this term.
• Original design manufacturer (ODM). An ODM makes products based on existing designs that they own. You can then sell the product under your brand, despite having little to no involvement in the design process. The advantage of using an ODM manufacturer is it almost entirely eliminates your development time, since you're working from a proven design that is supplied and ready to use. The downside is that your product will have little differentiation from the competition, since other companies are able to use the exact same design for their products. Private labeling is a similar but distinct arrangement where the product is already made and the client only adds their brand to it.
• Electronics manufacturing services (EMS). As the name implies, an EMS is a contract manufacturer that specializes in electronic parts and components, such as PCB assembly, cable harnesses, test fixtures, and box builds. See our page on electronics manufacturing services to find out how this integrates with mechanical fabrication.
• Contract manufacturing organization (CMO) and CDMO. A CDMO handles the development as well as the manufacturing. Both of these exist because building and validating a compliant facility is slow and expensive, so companies buy access to one that has already passed the audit. CMOs and CDMOs are standard for manufacturing pharmaceuticals and medical devices.

How the three most common models compare:

Criteria	CM	OEM	ODM
Design owner	You	You	The manufacturer
Your engineering input	High (shared throughout)	Moderate (you supply drawings)	Minimal
Time to production	Longest	Moderate	Shortest
Upfront investment	Highest	Moderate (some tooling required)	Lowest
Tooling rights	Usually yours (depends on contract)	Varies by contract	Manufacturer retains it
Differentiation	Highest	High	Lowest
Supply chain visibility	Greatest	Some	Usually limited

If you're weighing these options against each other for a specific project, this comparison of ODM, OEM, and CM models will give you a better idea of the pros and cons for each.

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Contract Manufacturing vs. Toll, Private Label, and Turnkey

Term	How it differs
Outsourcing	A broad category that includes contract manufacturing, which is the practice of outsourcing the production of a physical product.
Toll manufacturing	You supply the raw materials and pay a processing fee (rather than relying on the manufacturer to source them at a markup). This gives you more control over the material grade and cost, but leaves you with some of the material-related risks. Komaspec holds import licenses and can process customer-supplied material, so we can accommodate this model for those who prefer it.
Subcontracting	Usually the production of a component (rather than the whole product) that you then use as part of your build.
Private label	The product already exists and companies apply their own brand to it. With private labeling, you don't own or have any control over the design.
Turnkey	Full-scope contract manufacturing, where the contractor handles not only the production but also the sourcing, quality assurance, and other aspects of creating the final product.

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Examples - What Does Contract Manufacturing Look Like in Practice?

The clearest example is Foxconn, Apple's largest manufacturing partner and the assembler of most of the iPhones Apple sells. Apple owns the design, the software and the brand; Foxconn owns the factories. Nike shows the opposite shape. It produces none of the footwear it sells, working instead through a network of contract manufacturers, supplying the designs and requirements and sometimes specifying the materials or sub-suppliers to be used. One deep partnership or many managed relationships — both are contract manufacturing, and the choice decides how much supply chain management you keep.

Contract manufacturing is heavily used in electronics, automotive, aerospace, defense, semiconductors, pharmaceuticals, medical devices, and food production. But it's a feature of almost any industry that makes a physical product.

Here are a few specific examples of products that are made using contract manufacturing, built end-to-end at Komaspec:

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When Should You Use a Contract Manufacturer?

The main reasons to use a contract manufacturer are:

• You don't have the facilities, equipment, or staff needed to make the product yourself, and there's no compelling business case for making that investment.
• The demand for your product undergoes significant swings. So when demand is at its peak, it exceeds your production capacity. But building up the capacity to handle those high production volumes yourself would leave you with a lot of idle equipment and overstaffed whenever demand drops.
• You're entering a new product category that falls outside of your current tooling, so it's easier to rely on a manufacturer that already has the equipment and experience needed for your new line.
• The volume you need is too low to justify the cost of buying equipment, expanding floor space, and hiring people to manufacture it in-house.
• Making your product requires a facility, equipment, or a process you can't provide in-house, like testing, certification, or a cleanroom.
• Your product requires several different processes and integrating them all would be too challenging to manage.

In those cases, contract manufacturing will be your best option.

In some situations, however, it makes more sense to make your product in-house rather than outsourcing production. This might be the case if the production process you use is part of your competitive advantage, your IP is related to the way your product is made (not what it does), or the demand for your product is high and stable enough to justify the cost of building or expanding your production capacity.

Most production manufacturers also set a minimum annual volume before opening an account, and a minimum value per order per SKU. If your order falls below those minimums, an on-demand service like Komacut will serve you better than a standard contract manufacturer.

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How Much Does Contract Manufacturing Cost?

It's worth separating this into two questions. First, what affects the price you get quoted? Second, which lines are included on your invoice?

What affects the price?

The price for making your product will be based primarily on your design, the details of your order, and everything that needs to happen after the product is made.

Design factors that affect cost:

The materials you specify in your design are one of the cost factors. The grade of the material will decide the cost of the stock needed to manufacture your product (316 stainless steel is more expensive than 304, for instance), while the thickness of the material will determine the cut time required for each part.

The geometry of your part can also change the price. Every bend you include in the drawing will require a setup, for example. And if the flat pattern doesn't nest well on the sheet, it can produce more scrap that further inflates the price.

Tolerances that are difficult to achieve with the manufacturer's standard process will force them to add a secondary operation for your production run. This means an extra step for every unit you order, which in turn adds to the final cost.

Then there's the complexity of the finishing work. If your product needs deburring, tapping, PEM insertion, welding, or surface finishing, it all goes into the price you get quoted (and masking requirements are often more expensive than the coating itself).

Order details that affect cost:

The volume of product you want to produce will determine how far the cost of a fixed setup spreads, and the breakpoints in a price list usually track changeover time rather than round numbers.

If your part needs a die or a mold, this will also go into the price.

The contents of an assembly can also drive up the quote in ways that might surprise you. Assembly cost tracks the number of lines on the bill of materials rather than the size of the parts, so a product built from many small components can cost more to put together than a larger, simpler one.

Which facility you choose could also influence your price, since the different locations have their own labor rates, transit times, and duty treatments.

Post-production costs:

Then there's everything that happens once the product leaves the factory. That might include functional testing and certification, packaging, freight and duty. Engineering changes can be pricey, as well. Design revisions after the tooling has already been cut is often the most expensive line item for your part.

The best way to avoid any nasty surprises is to make sure your design gets a DFM review before you release the drawings (Komaspec provides one free of charge). The review will identify design issues that could affect your costs. That way, you can fix them early on instead of getting stuck in a negotiation after you already accepted a quote.

What lines show up on your quote?

The piece price listed on your invoice is the per-unit cost for making your product at the stated quantity.

The non-recurring engineering (NRE) line covers all the one-off work that needs to be done before the manufacturer can start production. This includes the tooling design, fixtures, test jigs, programming, and sample builds. If you get a quote that doesn't have a line for NRE, those costs are usually hidden somewhere else on the invoice or will be added somewhere down the line, so make sure to ask about it before agreeing to the price.

Tooling will also be listed on your invoice. You can pay the full cost for the molds and dies up front, or have the cost amortized across an agreed volume, where it will be rolled into the unit price. Amortization is easier on your cash flow because it spreads the costs over time, but it also ties you to the same supplier until the volume is reached.

Who owns the tooling?

The tooling is usually owned by whoever funded it. If you pay for the tool, you typically own it (but make sure this gets specified in the contract). If the supplier handles the cost of making the mold, the supplier owns it.

Shared arrangements are possible too. That's where both parties contribute to making the tool and they draft an agreement to specify how the ownership is split. This agreement should spell out the transfer conditions, what happens if you change supplier, where the tool will be stored, and who will be responsible for maintaining it. In practice, molds are typically stored at the molder's production facility and maintenance is part of the overall agreement. This is a sensible arrangement, so long as it is written down rather than assumed. Komaspec decides on tooling ownership on a per-project basis, depending on how the tool is funded.

Payment is normally staged, with a deposit paid at order and the remaining balance paid out once a defined milestone has been reached. You will be paying up before the product arrives and you can start selling it, so how the payments are scheduled matters.

What does the quote exclude?

The quote you get from a contract manufacturer will not include the cost of freight, duties and tariffs, packaging beyond standard export cartons, testing and certification, and prototype or sample charges.

Why is a low quote sometimes more expensive?

When outsourcing production, there's a risk that your landed cost will significantly exceed the price you were quoted. That could be due to engineering changes you requested after the tooling was already frozen, switching to air freight to ship the product because manufacturing went over schedule, or having to rework a batch that shipped with defects that had gone unnoticed until you received them. That's why you can pick the manufacturer with the cheapest quote and still lose money once these extra costs start accumulating.

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What Are the Advantages of Contract Manufacturing?

• Contract manufacturing frees up capital instead of tying it up in manufacturing capacity. When you work with a contract manufacturer, you purchase their manufacturing capacity as needed. This saves you from having to invest significant capital into building a facility, buying machinery, and keeping operators on staff.
• Contract manufacturing allows you to benefit from economies of scale. A manufacturer can buy coil stock, resin, and fasteners at huge volumes with discounted rates, and pass some of those savings onto you. The same goes for equipment utilization. A contract manufacturer can keep a press running for three shifts to handle several projects, which costs less per hour than having just one press running intermittently as needed.
• Vertical integration can reduce lead times. When you outsource production to a manufacturer that handles all the cutting, bending, welding, finishing, and assembly at the same facility, you don't have to budget extra time for your parts to be processed by different suppliers. Komaspec runs all of those processes in-house across six facilities, which means a design change can be handled in a matter of days rather than having to be passed down a chain where it will get done based on the schedules and priorities of multiple contractors.
• You can take advantage of staff with process expertise without having to hire anyone full-time. Getting a DFM review from the people who run the equipment will help you catch design problems early, like a radius that will cause the part to crack or a feature that doubles the cycle time for no real benefit. Keeping that kind of expertise on staff is expensive but it can be very affordable when it comes as part of the manufacturer's service.
• You can focus your attention on what you're good at. Dealing with production can consume a lot of management's time, especially when things are going wrong. Handing off that responsibility to a manufacturing partner frees up your engineering and leadership teams to focus on design, marketing, and building customer relationships. This can allow you to scale up your production volume without having to scale up your organization to match it.
• Contract manufacturing gives you access to more geographic options. Multi-site manufacturers can shift the work around for tariff, transit, or origin reasons. For example, one Komaspec customer distributing bike accessories to Australia, New Zealand, Canada, the US and Europe makes the components in China and assembles them in Vietnam, where a mix of local supply chain and in-house fabrication earns a made-in-Vietnam certificate of origin for shipments into the US. A second customer, a Canadian sauna and sauna heater brand, uses all three sites: China for shipments into Canada, Vietnam for supply into the US, and Mexico for the sheet metal parts and small assemblies on its other product line, where USMCA compliance and shorter lead times matter. It's worth noting here that USMCA does not require any specific certificate form, only nine data elements. And the certification can be completed by the importer, exporter, or producer.

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What Are the Risks, and How Do You Manage Them?

With contract manufacturing, the major risk is that you're outsourcing the production and have little control or insight over it. The best way to reduce risk is almost always to ensure that the production and agreement are planned out in a way that ensures your product will get made the way you want it, at the cost you expect, and on the right timeline.

Here are some of the specific risks you can run into when outsourcing production.

Subpar Quality Control

Because another company is handling production, you have to rely on them to ensure the quality of every process and the final outcome. To make sure this goes well, you should agree to inspection points and acceptance criteria in writing before the first run. Also, take the time to review the supplier's quality management system to make sure it's up to your standards. For electronics, name the standard that your part should meet (for electronic assemblies, this will usually be IPC-A-610). And don't be afraid to go over every detail: ask what happens when a part fails at different points of the manufacturing process, not just what the outgoing sampling plan is.

Schedule Overruns

When you're working with a contract manufacturer, you're just one of several customers they have to satisfy. If they run into delays, they may prioritize another customer over you, which could result in longer lead times. To mitigate this, get as much visibility into their system as you can. Ask what you can see and how current it is, and how a six-week outage would affect your product's timeline.

Intellectual Property Exposure

When you're contracting with a manufacturer, you will need to supply them with your drawings and in some cases your processes. If the manufacturer works with other clients in your market, there's a risk of your design being leaked or used to build products for your competitors. A contract is the best way to protect your IP in these situations. When you're working with subcontractors, you can also limit your IP risks by making sure they only see the designs for components they'll be manufacturing, not your full product.

Communication and Documentation Gaps

Most problems in contract manufacturing happen because the client didn't communicate a specification clearly enough or they sent a change request that got to the manufacturer too late. Working with a manufacturer in a different time zone can make things worse, but incomplete documentation is usually the biggest culprit. The best way to prevent this is to have account managers with engineering backgrounds, and to establish revision control that both you and the manufacturer can use.

Compliance and Tariffs

You are responsible for any regulatory problems with your product, not the manufacturer. It's your job to confirm which standards apply, what certification is needed, and to keep the documentation that proves that your product meets all requirements. Duty treatment and certificate of origin can move your landed cost more than any negotiation on piece price will, so settle where the product is made and how origin is certified early rather than after the first shipment.

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How Do You Choose a Contract Manufacturer?

Checking for ISO 9001 certification is a good first step, but it should not be the only one you take. In regulated industries — medical devices, pharmaceuticals, aerospace — certification is a hard requirement rather than a signal. Everywhere else, treat it as a baseline that needs a second layer of diligence on top. A certificate will tell you that a documented system has passed an audit on a particular date, but that's it. It won't ensure that the process meets your expectations or that the manufacturer will handle defects, delays, and other problems in a way that you find satisfactory.

Other than certification, ask these questions about the process control the manufacturer has in place:

• "At which steps is inspection performed, and which documented acceptance criteria does the process need to meet in order to pass?"
• "Is quality data captured digitally? If so, can you see it and how current is it?"
• "Can a finished unit be traced back to a work order and a material batch?"
• "Who develops the test fixtures and go/no-go gauges, and at what point in the project?"
• "Which product certifications have you supported, and for which markets?"
• "What happens to a part that fails, and who decides?"

Komaspec's answers, for reference. Inspection plans are built in a cloud system and pushed to QC tablets with the inspection points and acceptance criteria attached, and every unit gets 100% in-line inspection and functional testing. IQC, PQC and FQC data is captured digitally across an ERP, MES and QC software stack, with sampling sizes and work orders generated automatically, and the data can be exported for customer CoC and FQC reports.

Traceability runs to work order and batch level for internal production and for suppliers. Test jigs and go/no-go gauges are developed in-house, and the engineering team supports CE, UL, FCC and VDE approvals, having taken customer products through CSA, UL, ETL, FCC, KCC and CC certification.

Then ask the basic questions about capacity. Do they run the processes your product needs or do they contract those out? Can they meet the production volume you expect to hit in three years, or will you have to move to a manufacturer who can take on larger production runs? Will they say no to a design that won't work instead of agreeing to anything you submit even if it will result in defects and product issues?

For more advice on this, check out our guide to choosing a contract manufacturer.

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Working With Komaspec

Komaspec is a Canadian-owned contract manufacturer of mechanical and electro-mechanical products. We were founded in Guangzhou in 2005 and now have over 350 employees across six facilities in China, Vietnam, and Mexico. Our facilities have a total of 190,000 square feet of manufacturing space: four plants in Guangzhou, one in Hai Phong, and one in Juárez. Over 20 years we have built for more than 150 repeat customers across 25+ markets.

We run fabrication and assembly in-house: fiber laser cutting up to 20mm, CNC bending, milling and turning, stamping, tube fabrication, welding, plastic injection from 130 to 650 tons, PCBA and cable harness production, and electro-mechanical assembly.

Our more than 40 engineers and project managers handle DFM, prototyping, tooling design, and new product introduction – all backed by a ten-person sourcing team and 300+ suppliers.

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Frequently Asked Questions

What is a contract manufacturer?

A contract manufacturer is a company that makes a product on behalf of a client. That client supplies the design and specifications, and the product is then sold under their brand. In most cases, the client retains ownership of the design along with the finished product. The manufacturer supplies the equipment, labor, and process expertise needed to handle production, and often will also supply the raw materials.

What is the difference between contract manufacturing and toll manufacturing?

The difference is who supplies the raw materials. In contract manufacturing, the manufacturer sources the raw materials needed for the product and rolls the price of those materials (at a markup) into their production quote. In toll manufacturing, it's the client that supplies the materials. This allows them to avoid a markup, but they do need to pay a processing fee. Toll manufacturing gives the client more control over the grade and cost of the materials used in production, but they also retain some of the risks associated with sourcing those materials.

What is the difference between an OEM and an ODM?

An original equipment manufacturer (OEM) uses the manufacturing equipment they own to build a product based on the client's design. An original design manufacturer (ODM) not only supplies the equipment but builds the product based on a design they own. The client then sells that product under their own brand. The product may be lightly customized but for the most part is functionally identical to products the ODM makes for other clients. Working with an ODM usually means lower up-front costs and less time to production, but it results in a product with little differentiation from the competition.

What drives the cost of contract manufacturing?

The cost of a product will be affected by the material grade and thickness used, the part geometry and feature count, required tolerances, any secondary operations and finish that are needed, order volume, whether tooling is required, how much assembly is involved, and costs set outside the factory such as testing, packaging, freight, and duty.

Who owns the tooling in a contract manufacturing agreement?

In most cases, it's whoever paid for it. If the client pays for the tool, they normally retain ownership of it. If the supplier is the one who funded it, they typically are the ones who will own it. Clients and manufacturers can also decide on a shared ownership arrangement. In this case, a contract will outline the details of the split ownership, including transfer conditions, what happens if the client changes suppliers, where the tool will be stored, and who will be responsible for maintaining it.

What is a contract manufacturing agreement?

A contract manufacturing agreement is a contract between the manufacturer and the client that is hiring their services. It should outline all the details of the arrangement, including product specifications and drawings, quantities and minimum orders, pricing, lead times, quality standards and inspection criteria, tooling ownership, intellectual property rights, and confidentiality terms.