Open-book costing
Open-book costing is an arrangement in which a supplier shares its actual cost structure with the buyer: material costs, labor, overhead allocations, and margin. Instead of negotiating a single opaque price, the parties negotiate the components and agree how each will move over time. It trades supplier confidentiality for buyer commitment, and it only survives when both sides honor that trade.
Examples
Stamping under an LTA: A supplier discloses $3.10 steel, $1.45 conversion, $0.62 overhead, and 9% margin on a $5.65 bracket. The parties agree steel moves quarterly with a published index while conversion stays fixed for the 3-year term. When steel rises 12%, the price moves $0.37, and nothing else is reopened.
Shared savings: An open-book review shows a machined fitting carries $0.84 per part of manual deburring. The supplier proposes a tumbling process at $0.31, and the agreement splits the $0.53 saving 50/50 for the first year, so the supplier's reward for honesty shows up in its own margin.
Definition
Suppliers do not open their books for free. They accept open-book terms in exchange for something durable: a multi-year award, committed volumes, or a shared-savings split that lets them keep part of every cost reduction they help find. Asking for cost transparency while keeping the business on 12-month competitive cycles gets you fiction formatted as a cost breakdown structure.
The mechanics matter as much as the principle. Agree on a standard breakdown template, define which cost elements are auditable and how often, and decide up front what the buyer will and will not challenge; most agreements protect the margin line and negotiate the cost lines. Pair the open book with index mechanics, often a price escalation clause, so material movements adjust through an agreed formula instead of an annual argument.
Disclosed numbers are most useful when the buyer can check them against an independent reference. A should-cost analysis built from process steps and material weights tells you whether the stated overhead rate is plausible, a discipline covered in our guide to should-cost modeling for consumer electronics. Direct-materials teams use platforms like LightSource to compare disclosed cost breakdowns against should-cost baselines line by line.
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