A company must consider many issues when negotiating and entering into a customer product development and manufacturing agreement. The following is a brief checklist and discussion of some of the primary issues that should be considered.
Products The agreement should provide a description of the products to be manufactured, order quantities, performance specifications, material requirements, whether the customer may specify a private labeling of the product, options to acquire additional product on preferred terms after the initial order quantity and lead times required for product orders. The supplier should consider lead times for critical parts and any potential bottleneck issues before agreeing to specific delivery performance requirements.
Supplier Obligations The parties should consider whether the supplier is obligated to devote specified resources to develop and deliver the products on the agreed upon schedule. Intellectual property ownership should be clearly defined in the agreement. In some cases, the supplier may be obligated to provide information at certain points through a product development process. The agreement should address any applicable regulatory compliance requirements. The supplier may be obligated to provide special installation, modification, training, and support services after product delivery. The parties should determine whether the supplier has the option of sub-contracting certain functions to other parties. The supplier may also be obligated to maintain certain levels of inventories and use specified types of critical source materials.
Customer Obligations The customer may be subject to special obligations to the supplier. For example, the parties may agree that the supplier will be the sole source for the manufactured product. The customer may be subject to special re-sale restrictions, territorial or otherwise. The customer may be required to assist and contribute agreed upon resources to the development process. The customer may also be required in some cases to provide end-user performance feedback.
Purchase Price and Payment Terms The agreement should specify the amount and terms for the purchase price. In some cases, all or a portion of the purchase price may be subject to pre-payment or a staged payment schedule based on milestones achieved in the product development process. It is in both parties' best interests to ensure that the supplier has adequate resources available to complete the development process. If a purchase price is offered on a per unit basis, will the price be subject to a schedule based on the quantity of units purchased. The parties must ensure that all anti-trust compliance requirements are satisfied. If there are unexpected raw materials increases, the parties may agree to a cost-plus-margin pricing arrangement. The parties may agree that a late payment penalty applies in the event that the customer does not make payment on the agreed upon schedule.
Delivery The timing of delivery should be specified, including quantities at each delivery stage, if applicable. In some cases technical information and/or manuals may also be required at the time of delivery. The contract should be clear as to whether such supplemental information is required. In some cases proof of regulatory compliance may also be required. The parties should specify the means and terms of delivery. If product inspection and quality testing is required, the agreement should specify the process for such inspection and testing. In some cases, a discount may apply in the event of a delivery delay.
Intellectual Property Issues If applicable, the agreement should include confidentiality clauses; patent, trademark, copyright and other intellectual property protection terms; noncompetition provisions and non-infringement representations, warranties and enforcement terms.
Other Issues The agreement should clarify whether any product warranties apply, in addition to indemnification provisions, required insurance coverage and limitations on liability. The term of the agreement should also be addressed, including how extensions will be handled.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
