Make in-house or buy from a subcontractor: the comparison rests on the costs that really disappear

30 October 2026, 13:37

Anyone who sets a subcontractor's quotation beside the cost their accounts assign to a part is often comparing two numbers that do not measure the same thing: the first is what would leave the cash account to buy it, the second includes expenses that would remain even if that part were no longer made. On 27 October Lovato Electric, an electrical components company near Bergamo, opened a new plant at Gorle for plastic moulding and mould making, at a cost of €14 million: with that sum, its chief executive said, "we could have moulded a great deal, had we relied on a subcontractor". The company preferred to produce for itself in order to deliver faster, and anyone running a business who faces the same choice wonders which calculations should decide it.

The quotation is compared with the costs that would go away

The full cost of a part adds up the raw material, the hours of those who work on it, the energy of the machine and a share of the department's general expenses, such as depreciation of the plant, rent and the department head's salary. If the part goes to a subcontractor, the raw material is no longer bought and the energy no longer consumed, while depreciation, rent and the department head's salary stay exactly the same. The workers' hours disappear only if those people are moved to other useful work, because otherwise they go on being paid without producing.

The items that would really cease are called avoidable costs, and it is their sum that the quotation must be compared with. A price below full cost can therefore turn out dearer than what the company spends on that part today.

With the department saturated, the new fixed expenses count too

The same reasoning applies to anyone wanting to bring work back in-house, and the answer depends on how full the department is. As long as machines and people have free hours, the extra work costs only the avoidable costs, because everything else is paid in any case. When the department is saturated, however, more space, machines and people are needed, that is, fixed expenses that did not exist before: depreciation of the investment, interest on the loan that pays for it, salaries and maintenance.

The comparison is then made over the year and on the expected volumes: on one side what would be paid to the subcontractor, on the other the new fixed expenses plus the costs that grow with each part. The result is the annual quantity above which producing pays, and the decision depends on how likely it is to reach and hold that quantity, because the subcontractor is paid by the part and, if orders fall, its invoice falls with them, while the loan instalments and salaries stay the same. Whoever brings a process in-house thus turns a cost that follows sales into one that does not, and in years of lower sales the income statement and the cash both feel it.

Delivery time is measured in stock and lost orders

The speed that guided the choice of the Bergamo company can be translated into money, and it is prudent to do so before putting it in the calculation. A subcontractor works for several customers, sets minimum quantities and has its own queue of jobs, so whoever depends on it orders earlier and in larger batches than it would need. The difference ends up in the warehouse, where it ties up cash, takes up space and risks becoming useless at the first change to the product. It is measured by comparing the days of stock held today to cover the supplier's lead times with those that would be enough when producing in-house, and to that figure are added the urgent transport paid for and the orders lost through late delivery, when they can be counted. If the annual total is small compared with the new fixed expenses, speed alone does not justify the investment.

Fixed expenses fall on the products that remain

The most frequent mistake concerns the opposite path. The product whose full cost exceeds the quotation received is sent outside; the department's fixed expenses do not fall and are divided over fewer hours, so the hourly cost rises and the other products look dearer than before. Another job then appears uncompetitive and takes the same path, until the company is buying more and more from outside while still paying the same rents and depreciation.

This is why the choice begins before the quotation is requested, with a cost analysis that divides each department's items into those that cease when a job leaves and those that remain.

This article was prompted by a news item published in BergamoNews on 28 October 2026.