Manufacturing agreement (services, customer-geared)

Model manufacturing agreement under which manufacturer provides manufacturing services on the raw materials, ingredients and half-products of the customer.

Model manufacturing agreement for performing manufacturing services to the customer. Key characteristic is that the manufacturing are structured as a service, not as a sale of manufactured goods. The manufacturing services agreement implies that any raw materials, ingredients and half-products are delivered to the manufacturer at the risk and for the account of the customer. If you need a manufacture agreement structured as a sale of manufactured goods, download the model ITC manufacture agreement.

The manufacturing agreement provides the key clauses specific to providing manufacturing services, and is oriented towards the customer’s interests:

1. a specification of the to-be-manufactured goods (in the form of a Statement of Work),
2. an arrangement ascertaining a certain minimum SLA-performance level;
3. a clause dealing with later variations, further-detailing and change requests;
4. a clause organising the testing and ‘acceptance’ of delivered SOW-milestones and goods; and
5. the payment of a manufacturing services fee with compensation of out-of-pocket expenses (not a purchase price).

The ownership in the customer-deliverables and the resulting manufactured goods are at all times of customer. The parties may restructure the manufacturing agreement in such way that a third-party would assume the risk in raw materials, ingredients and half-products. Currently, no clause addresses this part of how the manufacturer acquires its raw materials, ingredients and half-products.

Where the produced goods (or any milestone defined in the underlying SOW) are somewhat complex, it is recommended that both the production process that might lead to extra-work and not-budgetted manufacturing service fees be addressed in a clear change-request procedure (aka ‘variation’). Accordingly, there should not be extra costs, unless it was approved in advance.

Similarly, to avoid a sub-standard quality of manufactured goods, it is recommended that a certain testing-and-acceptance procedure be followed: it prevents that any dispute escalates to agreement-level, and it prevents that the customer may be required to accept only part of the ordered goods (where it may invariably need all).

Anticipating some level complexity, the manufacturing agreement also provides for an allocation of IP rights, as well as entitlement to intellectual property resulting from the manufacturing services. And accordingly, where the manufacturer uses processes or technologies that are protected by third-party IP rights, customer should be able to rely on an IP indemnity clause.

The manufacturing agreement also contains a number of optional clauses, such as a penalty (liquidated damages) clause in case of late performance and delays, as well as a clause organising the coordinated manufacturing: a steering committee to oversee the production, with periodical performance evaluation.

Finally, a template for an SOW (statement of work) is attached as schedule to the manufacturing agreement, which the parties might use as a guideline to further define the manufacturing services.

More about manufacturing agreement explained in our online book.