At the most basic level, manufacturing contracts are agreements that say “Hey… I’m going to pay your guys’ company to manufacture this product for our company.” Seems pretty straight forward doesn’t it?
Something that should be relatively painless and straightforward could turn into a nightmare for you and your company if all of the issues are not properly addressed. Just like all other legally binding contracts and agreements, you need to cover all angles and make sure you have all issues addressed.
“In any event, the ability to successfully utilize outsourced manufacturing capacity is a critical component of a company’s competitive advantages, and the components of these successful relationships are imbedded in the manufacturing agreement itself.
Key business or term sheet elements of a manufacturing contract include:
- Pricing terms, including base pricing, volume-based adjustments, forecasting issues, and other pricing factors
- Volume production / purchase commitments, including whether there are any manufacturing minimums
- Payment terms
- The contract length
- Any intellectual property / technology development issues, such as technology transfer or ownership issues
- Exclusivity or non-exclusive production, both of which are loaded issues for the parties
- Quality assurance, including the potential impact of recall issues, which have hit the headlines in the past 12 months, particularly with regard to children’s toys
Once the business terms are established as a baseline for the negotiation and drafting of the manufacturing contract, the lawyers can take over on the legalese. That being said, it’s always helpful to consult other manufacturing contracts as a reference point, and as I mentioned previously, you can find thousands of manufacturing contracts at RealDealDocs.com.
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