Fixed-price contract, rising component costs: protecting margin in defence tech

«We signed a batch contract at a fixed price and counted a 40% margin. By the time we reached production, key components had risen a quarter and the euro had moved. The margin melted almost to zero. Since then we don't sign a fixed price without a buffer and a link to component cost.»

This is a painful but typical story in defence tech. Months pass between signing a contract and actual production, and in that time the prices of drones, optics and electronics can jump and the currency can shift. A fixed price that looked profitable on paper turns loss-making at assembly. Let's look at how to avoid it.

Why fixed price is so risky in defence tech

In ordinary manufacturing, cost is more or less stable. In defence tech it isn't. Components are often imported and paid for in foreign currency, so the exchange rate adds another layer of risk. Supply chains are unstable, and a scarce chip can rise tens of percent in a month. Most of all, there's the time gap: you fix the price today but buy components and assemble a quarter later, when the market is different. Under a fixed price, all these risks land on you.

Let's count how the margin melts

Take a unit contract price of $2,000 and the cost at signing.

A 25% jump in components halved the profit per unit — from $500 to $250, at an unchanged contract price. Add a currency move on the FX purchase and the profit easily goes to zero. And it's across the whole batch at once, not one unit.

How to protect the margin

The first protection is a buffer in the price. A fixed price should build in not today's cost but cost with a margin of safety for the likely move in prices and rates over the delivery term. The second is locking component cost: a prepayment or a price agreement with the supplier right after signing, to fix the BOM while it's known. The third is an indexation clause in the contract where possible: the price adjusts if the cost of key components moves beyond an agreed threshold. The fourth is a currency reserve or hedging on euro and dollar purchases.

«A fixed price isn't a promise of a price — it's a bet that cost won't change. In defence tech it almost always changes, so either build a buffer or lock the components at signing.»

The key is to see margin erosion early

The worst part isn't the jump itself but that it's noticed at assembly, when it's too late. If you track actual BOM cost per contract and compare it with the contract price, you see the margin melting before you've spent the money. Then there's time to act: negotiate indexation, lock component prices, revisit the volume. A decision made a month before production costs far less than a loss-making batch.

What it looks like in real life

You hear the problem in typical phrases. «The contract's signed at a good price, and now we're afraid to buy the components.» «I think we're already at a loss on this batch because of the rate, but we didn't really count.» «The supplier raised the chip price, but the contract's fixed — we'll have to eat it.» «Let's count margin after delivery» — when nothing can be changed. All of it is a fixed price with no protection and accounting that can't see cost in real time.

How to keep it under control

To avoid this trap you need to see, per contract, the current BOM cost against the contract price. In Finmap you set up the contract as a project, post actual costs of components and labour, keep multi-currency purchase accounting — and see the batch's real margin in real time, not after delivery. When a component gets more expensive, it shows in the report at once, and you have time to decide.

Related — how to calculate the real unit cost of a drone and buying components abroad in several currencies.

A few tips

• Build a buffer into the fixed price — for the move in component prices and the rate over the whole delivery term.
• Lock component cost right after signing: a prepayment or a fixed price from the supplier.
• Add an indexation clause where the contract allows — for a sharp rise in key items.
• Track actual BOM cost per contract and compare it with the price in real time.
• Keep a currency reserve on euro/dollar purchases — the rate can eat margin no less than prices.

A fixed price isn't bad in itself — what's bad is a fixed price with no protection against cost changing. The moment you build a buffer, lock the components and see the batch's margin in real time, a price jump stops being a catastrophe and becomes a managed risk.

Money Doesn't Disappear. You Just Don't See It.

Try Finmap free for 14 days and see the real margin on every contract in real time — before a price jump eats the batch.