What is a Contract Manufacturing Agreement?
By definition, a contract manufacturing agreement is a legal document which is drawn up between two companies: a contract manufacturer and an outside company. This document outlines the terms and conditions of a company’s relationship with contract manufacturer and serves to protect both parties from liabilities.
Why a Contract Manufacturing Agreement is Important
Many companies work with manufacturing companies in order to create a product without having to invest in the specialized equipment, machinery, or manpower to do so. Many manufacturing companies also offer delivery services, which helps companies cut costs and streamline their production and delivery.
Having a contract manufacturing agreement in place is a critical part of third-party risk management, and helps ensure expectations around quality standards, key processes, and turnaround time are consistently met and upheld. It also outlines what happens if they aren’t.
These agreements vary depending on the type of contract manufacturing agreement you are signing, such as:
- Private Label Manufacturing. With this type of contract manufacturing, the manufacturer delivers a finished product which is outlined by the company that hired them.
- Individual Component Manufacturing. Here, the contract manufacturer is only responsible for making one component of a larger product.
- Labor or Service Subcontracting. Here, the manufacturer is either only involved with one part of the larger manufacturing process or functions as a subcontractor.
- End-to-End Manufacturing. Much like private label manufacturing, the entire product is completed, end-to-end. But here, the contract manufacturer is typically more involved in the product design and may offer feedback and insight into the product development.
What’s Included in the Contract Details?
There are several common topics that are included in supply chain agreements and contract manufacturing agreements. In many ways, a contract manufacturing agreement is much the same as any other legal relationship or the agreements made between various business partners.
In general, these are the most common inclusions found within a manufacturing contract:
- Services provide
- Project costs
- Quality standards
- Feeds for production
- Turnaround time
- Liability
- Intellectual property rights
- Termination clauses
Services Provided
This part of the legal contract will outline the services that the manufacturing process agrees to complete on a businesses behalf.
For example:
Manufacturer shall manufacture, label, package, store, and ship to Customer at the location Customer specifies the Products set forth in Exhibit A in accordance with good manufacturing practices prevailing in the industry and in strict compliance with the terms of this Agreement and the specifications, manufacturing process and quality control standards set forth in Exhibit C (as amended from time to time, the “Specifications”).
Project Costs
The business agreement should also outline what the specific costs are for the services provided and any additional stipulations .
For example:
(a) The price per case for each Product is set forth on XX. The price per case does includes the cost for wood pallets.
(b) Shipping costs to the designated destinations are not included in the listed price, but shall be handled on a prepaid basis by the XX. Shipping shall be by air to customer’s main distribution center in CA.
(c) All Products shall be shipped and invoiced to Customer or Distributor as specified in the applicable purchase order.
(d) Payment for orders shall be net XX days from the invoice date. Invoices shall specify the Products purchased, the quantities, the stock numbers, and the shipping charges for each order.
Quality Standards
The quality agreement portion of the contract outlines specific quality parameters for the product or project. It specifies who’s responsible for the execution of the product creation and quality assurance and may include details around the safety, potency, and/or purity of a product.
For example:“Supplier Quality Agreement” means all of the quality standards to which the Parties have agreed and which are documented in a Supplier Quality Agreement in Exhibit B.
and,
Breach of Supplier Quality Agreement. The Manufacturing Company agrees that a breach of a Supplier Quality Agreement in Exhibit B is a material breach of this Supply Agreement and is a ground for termination unless the breach is cured in accordance with 2.2(c)(ii).
Fees for Production
This part of the contract outlines any additional fees for the production or shipping of a product.
For example:
Subject to Sections 2.2(c) and 2.3(c), PURCHASER will pay SUPPLIER the applicable Production Fees for Product (including costs of Active Ingredient, Raw Materials, manufacturing, filling, inspecting, quality control, stability testing and packaging) or Active Ingredient delivered to PURCHASER hereunder.
The prices for the supply of each Product (the “Manufacturing Fee”) and Packaged Tablets (the “Packaging Fee”) shall be equal to the prices set forth in Schedule 6.1; provided, however, the price for the Products and Packaged Tablets set forth in Schedule 6.1 shall be modified at the commencement of each Contract Year after the initial Contract Year as set forth in Section 6.2.
Turnaround time
How long it takes for a manufacturing company to complete the entire production process is a critical part of your manufacturing agreement. It ensures there’s no disruptions within the product’s supply chain and helps companies manage inventory management.
For example:
Contractor shall use its best efforts to ensure that its turnaround time for producing lead pipes shall not exceed 30 days for each agreed upon batch.
Liability
Limitation of liability clauses help protect and limit the amount one party is required to pay to the other party if there’s a loss due to breach of contract. This is sensitive part of the contract, and to be enforceable these clauses need careful attention.
For example:
Manufacturer’s maximum liability to Purchaser in any calendar year under this Supply Agreement, including its indemnity obligations, shall not exceed XX, except with respect to damages or claims resulting from Manufacturer’s gross negligence, fraud, willful misconduct or breach of confidentiality obligations.
Intellectual property rights
This part of the contract manufacturing agreement ensures that any patents, inventions, “trade secrets,” property and processes are protected. So, if a manufacturer is working on developing a specialized part for a Mac computer, the manufacturer can’t sell that information to a competitor.
For example:
Means inventions or discoveries (whether or not patentable), Patent Rights, know-how, trade secrets, technical information and all other intellectual property rights owned by or licensed to the Customer and its Affiliates that relate to or are necessary to manufacture and distribute the Products, and all related documentation or other tangible expressions thereof, anywhere in the world, including without limitation, rights to the technology. “Manufacturing Requirements” shall have the meaning ascribed to it in Section 2.4.1.
Termination clauses
The termination of a relationship between a manufacturer and company may happen for a variety of reasons, whether that be by agreement of as a result of a breach of contract, the contract manufacturing agreement must outline causes for termination.
(a)By Agreement. The Parties may terminate this Supply Agreement by mutual written agreement.
(b)Discontinuance. The Parties may terminate this Supply Agreement in the event MST decides to discontinue manufacture and sale of a Product, subject to the notice requirements set forth in 6.1.1, unless COMPANY deletes the relevant Exhibit A for the Product from this Supply Agreement pursuant to 3.2(b)(ii).
