Manufacturing contracts specify the details of an agreement between a contractor (equipment manufacturer) and a client.
In some cases, the agreement terms cover one aspect of the project. In other cases, the contract covers the entire manufacturing process.
This article covers everything you need to know when creating a contract manufacturing agreement.
We’ll also cover the types of manufacturing contracts and why they’re necessary.
Key takeaways
- Manufacturing contracts are documents that specify the details of an agreement between a contractor and a client (or subcontractor).
- Contract manufacturing involves delegating one aspect of the project (such as product design) or the entire production process to a certified contractor.
- Before contracting with a manufacturer, verify their reputation, pricing, lead times, product quality, and intellectual property rights.
Who needs manufacturing contracts?
Any individual company that delivers manufacturing services — whether steelwork, construction, or equipment maintenance — must work with legally binding manufacturing contracts.
The contract should outline the responsibilities of all parties, turnaround time, cost estimates, and liabilities.
Other clauses to include in a manufacturing contract include litigation, non-disclosure, purchase orders, etc.
Furthermore, companies with limited human and financial resources can outsource projects to contract manufacturers.
This extends scalability to small businesses and large companies expecting a large volume of production beyond their usual capacity.
For projects that require physical delivery, the contract manufacturer is responsible for the new product at every stage of the supply chain.
Types of manufacturing contracts
A contract manufacturing agreement can take on any of the following forms:
- Private label manufacturing: The client outsources the entire production, from process planning to assembly and logistics. Under this contract type, the manufacturer builds the final product, and the client places their branding on it for commercial sales. For instance, an M4 chip manufacturer can sell chips to Apple.
- Individual component manufacturing: The contractor delivers a specific component to the client. Formula 1 team Force India ordered engines from Mercedes AMG and built their own race car around them, using internally sourced parts.
- Labor/service contracting: The contractor delegates one aspect of the project to a pre-approved subcontractor. Sometimes, the client appoints the subcontractor just like Real Madrid did with Hewlett-Packard Systems as part of their sponsorship deal.
- End-to-end manufacturing: A contract manufacturer takes on the entire project with limited input from the client. Conglomerates like the China Evergrande Group and India’s TATA Steel work with end-to-end manufacturing contracts.
- Original design manufacturing (ODM): The contracting company only delivers the product design and 3D models to the client.
- Equipment leasing: The client signs a contract to borrow equipment, raw materials, or facilities for in-house manufacturing. One example: Haas can lend out VF-6 milling machines to companies for a specific duration.
The contractor can deliver the same service to all their clients under end-to-end manufacturing agreements.
However, under the private label contract, that contract must protect the client’s intellectual property.
Key considerations when creating and negotiating manufacturing contracts
Before authoring or even negotiating a contract manufacturing agreement, here are some things to consider.
Reputation
Only work with manufacturing companies with a stellar reputation and positive reviews. Why is this important?
Because getting into business with a shady construction company will lead to financial losses or even endanger human lives, depending on the product.
Cultural differences
Understanding the differences in manufacturing cultures can help you choose the right partner and draft the contract correctly.
For instance, Progresstech Ukraine uses DSTU and GOST design standards but has found a way to partner with Boeing, which uses ISO for quality management standards.
Other cultural differences to factor in include religion, time zones, work culture, bureaucracy, and technological advancements.
Cost
Always analyze the available funds before hiring an original equipment manufacturer (OEM) or private-label contractor.
Before doing so, agree on how to structure pricing, labor costs, billing, and payments.
Some contract cost types include:
- Lump sum (fixed price) contract: Both parties agree on a total fixed price for the entire project.
- Unit price contract: Both parties agree on the price of every unit of work, such as the cost of every engine block for automotive parts.
- Hourly contract: The contract gets paid by the number of billable hours or the duration of a rental of manufacturing facilities or labor force.
- Design and build contract: The manufacturing company designs and manufactures the product.
A contract management solution can not only help you draft contracts from templates based on the pricing model; it can also streamline all associated workflows in a transparent manner.
For example, manufacturing client Invaco relied on an overly complicated process for quote generation, specifically an inability to provide an up-to-date, itemized breakdown of parts to be repaired or replaced for vehicles the company serviced under contract.
After implementing PandaDoc software, listing down costs became clear and easy to execute, and the company’s reps appreciated the software for its sales enablement capabilities and payment integrations to settle invoices faster.
Timelines
Negotiate a favorable start and completion date, leaving enough time for inspections and recalls, change orders, and force majeure.
To keep the contracting or subcontracting company on its toes, divide the entire timeline into milestones and “checkpoints.”
Copyright and intellectual property
Use non-disclosure agreements (NDAs) and non-competes to prevent the manufacturer from selling your intellectual property to another client or competitor.
Hire a lawyer to copyright all proprietary designs, prototypes, models, parts, assemblies, and documentation.
Also, make provisions for intellectual property violations and breaches to make the litigation process smoother.
Product quality
This seems like a no-brainer: the manufacturer must deliver premium quality. But the reality is quite different.
Contract manufacturers may try to cut corners to maximize profits, and the cost of production also varies by quality standards.
Suppose you want to order parts for precision steel machinery — the contract must contain the exact tolerance of every part to the minutest micrometer.
Otherwise, you will end up with a warehouse of useless steelworks.
Advantages of using manufacturing contracts
Here are the benefits of signing agreements with contract manufacturing companies:
- They allow you to delegate product development to experts with loads of experience while your team focuses on their core competencies.
- Outsourcing manufacturing contracts — China is an obvious example here — helps your organization get products to market faster, in accordance with concrete timelines.
- Contract manufacturing also allows for product development to be outsourced to international companies via an established, universal quality control mechanism.
- Contract milestones help organizations plan marketing strategies and rollout campaigns for high-quality products confidently.
- Organizations with disparate cultures can use a manufacturing contract to reach common ground on standards, processes, and economies of scale.
Vallen Distribution, a PandaDoc client, is an example of the advantages that come with using dedicated software for manufacturing contracts.
The company needed consistency in the numerous sales proposals their reps generated each month.
By adopting the PandaDoc platform for document generation and management, they were able to automate proposal creation while personalizing it to specific clients — direct pain points they were looking to solve.
Doing so resulted in a 75% reduction in proposal creation time, giving reps the ability to focus on nurturing clients and closing deals.
Speed up negotiations with automated manufacturing contracts
When drafting or negotiating manufacturing contracts, always consider the contractor’s reputation and track record in the manufacturing industry.
The contract can help you lend manufacturing facilities, equipment, or labor.
It can also come in handy when outsourcing small and large-scale machining processes across the production line.
You can speed up contract negotiations with manufacturers by using PandaDoc templates as well as the AI-powered editor.
And the platform makes it easy to sign, track, and store all legal documents securely.
To choose the best types of contract manufacturing agreements, consult your legal team to find out which one suits your use case.
Want to start creating manufacturing contracts for your projects? Reach out to us right away.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDoc services are governed by our Terms of Use and Privacy Policy.
