Contract Manufacturing Agreement – Framework, Risks & Liabilities

The industry has come a long way as it has evolved over the years.

In most cases, what comes to mind when manufacturing is mentioned in the picture of huge machines controlled by experienced operators as well as an army of factory workers going about their assigned jobs which culminate in the emergence of the desired end product.

The production process starts with the purchase and installation of the required equipment, ordering for production supplies, test the running phase as well as effecting necessary corrections where needed before full production takes off.

Contract Manufacturing Agreement

Businesses have found a way of reducing their cost of production by simply outsourcing their manufacturing needs to competent contract manufacturers. This aspect of production is what we are interested in as we discuss the contract manufacturing agreement.

To meet specifications as well as keep to certain guidelines, a contract will need to be entered into between both parties.

What a Contract Manufacturing Agreement Entails

In defining the manufacturing agreement, it simply refers to a contract entered into between the product developer and manufacturer.

This contract defines several aspects of the business that include the specifications of the products to be manufactured, the volume of products to be produced, how these products will be priced, as well as how production the product developer will receive the produced products.

The contract process is supervised by the relevant regulatory bodies which include the Food and Drug Administration, the Environmental Protection Agency, and the U.S Department of Agriculture among others.

The Contract Framework

In establishing the contract, there have to be guiding principles to the contract agreed upon by both parties.

Some of these include the rights of product design, rights of design modification, the refund policies of the contract agreement as well as the cessation of the contract.

These segments of the agreement are very important as they guide the relationship between the product developer and manufacturer to ensure that misunderstandings and conflicts are reduced to the barest minimum during the duration of the contract. It also sets a clear timeline or contract tenure for which the contract is expected to last.

Before the termination of the contract, it is expected that there should be sufficient notice. The contract agreement considers these.

Contract Risks

As with any human activity, risks are also very much a part of the product development and production process.

These risks will need to be clearly identified and spelled out in the contract terms. Because these risks are important to how effective or efficient the relationship is, they should be fully identified and defined, and the parties responsible for certain risks stated.

This eliminates any form of disagreements that may stall the production process. Product delivery is a key component of the relationship.

There may be times when deadlines are exceeded and products not delivered as at when due. This has the capacity to cause losses especially on the side of the product developer who will need to meet his supply chain in due time.

Liabilities and Intellectual Property Theft

When entering into a contract manufacturing agreement, it is necessary to fully clarify this aspect of the business.

Here both parties will need to have a clear understanding and agree on the procedures to take if there is an intellectual property theft as well as other liabilities resulting from not fulfilling all regulatory requirements.

Full Compliance with Regulatory Laws and Safety Measures

A contract manufacturing agreement is expected to be fully compliant with all the necessary regulatory laws as well as meeting all safety measures specified by the relevant regulatory bodies.

This is expected to be clearly spelled out. In doing this, the responsibility of finding a licensed product manufacturer is necessary.

This is because all transactions will be professionally handled, thereby eliminating the chances of failure significantly.


This is another important section of the contract manufacturing agreement which guides the relationship between the product developer and the manufacturer.

In the confidentiality agreement, all confidential information is to be kept safe and never disclosed to a third party for as long as the contract lasts.

This protects the interest of both parties and as well as safeguards its success formula.

Minimum Orders

When entering into a contract manufacturing agreement, a minimum number of orders may be required by the manufacturer.

To most manufacturers, the minimum order requirement helps to significantly lower the cost of production.

Although this works for manufacturers, this is not always the case for customers as they will not like to be restricted in any way by a minimum amount of orders as it enhances the capacity of businesses (particularly small businesses) to grow by giving them flexibility in the number of products they can manufacture.

This is very essential for businesses operating on low budgets.

The contract manufacturing agreement is very important for businesses as they can easily manufacture their products without having to purchase equipment and machinery which can cost much more.

By outsourcing your manufacturing needs, you can concentrate on other equally important aspects of your business such as distribution and marketing among others.

Small businesses can use the contract manufacturing agreement to their advantage as it eliminates the need to have to establish a production line which will require a lot of funding.