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What is a Manufacturing Agreement?
A Manufacturing Agreement is a contract between two parties for the manufacture and sale of goods.
A Manufacturing Agreement sets out clearly the type, quantity, and specifications of the goods to be manufactured, as well as the purchase price and payment terms.
A Manufacturing Agreement also sets out any minimum purchase obligations, warranties given in respect of the goods, and how title and risks in those goods pass.
What is the purpose of a Manufacturing Agreement?
A Manufacturing Agreement helps to govern the relationship between a manufacturer, supplier, and distributor by outlining their duties and responsibilities. Businesses use this agreement to improve the supply chain, protect their rights and save cost.
Most businesses that work as a supplier or distributor need this agreement because they often purchase bulk amounts of goods from the manufacturer and distribute them in local markets. So, having a well-drafted manufacturing agreement will give them a strong legal footing in case of any disputes in the future.
What should be included in a Manufacturing Agreement?
These are the important things that should be included in a Manufacturing Agreement. I.e.;
Product Specification: A well-written product specification will help both parties to avoid error, save time and cost which ultimately leads to better growth of any business.
Duration of the agreement: This is the time period of the agreement. Normally it ranges from 1 to 5 years. The duration can be extended upon mutual consent once the term of an agreement is over.
Payment terms: This includes detail about the payment terms. It can be a lump sum amount, installment, or payment cycle.
Confidentiality: Both parties should not leak any confidential information that may hamper the organization in any possible way.
Logistics information: A clear detail about shipping and logistics will help both parties to save time and money by tracking the shipment and getting the delivery on time.
Clause for damaged goods: A product can get damaged during the shipment process, so it should be made clear in the agreement, who is going to cover for the damage.
Termination: This includes the terms and conditions under which the agreement can be terminated. Normally a repeated breach of contract and poor quality of goods can lead to contract termination.
Features of Manufacturing Agreement
Cost Saving: Companies save on the cost of production. This includes labor and manpower costs, equipments and others.
Quality control: Manufacturers have better knowledge of quality control and so they are are better experienced to provide better end results.
Competence: Companies can focus on their core competencies and better direct resources when manufacturing is outsourced.
Scaled production: As contract manufacturers produce goods for multiple customers, they get raw materials for better price. Hence, the overal cost for companies reduces drastically too.
A Manufacturing Agreement is a legal document that defines the obligations and the rights of the manufacturer and distributor, in order to provide a specified product on pre-defined terms. The main purpose of having a manufacturing agreement is to give a clear understanding of the responsibilities, legal rights, and obligations of both parties, to ensure that the specified products, provided by the manufacturer, are delivered to the distributor accordingly.
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