Top 20 Issues in Manufacturing Outsourcing Contracts (Made to Spec Agreements)

[UPDATE: An updated version of this article appears at this link - read it instead --> https://www.dhirubhai.net/pulse/key-issues-consider-outsourced-manufacturing-agreement-brian-heller-yvbbe ]

This article is written from the perspective of the Buyer - the one who is outsourcing manufacturing of something they will then sell (for example, if you sell widgets, and want to hire a company to make the widgets for you). Of course the Seller / Manufacturer will have different positions and preferences. But as a Buyer of Outsourced Manufacturing, here's a checklist of Contract issues to look out for. If you are going to hire a company to manufacture bespoke products, to your custom specifications, here are my top 20 questions and issues you need to consider before choosing a manufacturer and when drafting or reviewing the contract with them. Be sure to address all of the following:

1. Create detailed and specific Product specs and quality requirements?(create your specs and determine who can best meet these requirements).
2. Create testing and acceptance (or rejection) criteria and processes.
3. Consider product quality guarantees and assurances (e.g., what remedies will you have if the products are not up to proper quality?)
4. Timeline assurances (if they say it'll take 4 weeks to produce 5000 units, what happens if it takes 5 weeks? Or 10?)
5. Carefully consider and spell out all economics and timing of payments
6. Clarify IP ownership over specs, ideas, and product designs (you want to own the IP for your own designs and products).
7. Add Confidentiality Provisions. You might be sharing go to market timing & strategies, and other confidential or sensitive info you so not want your competitors to know.
8. The Seller cannot use any knowledge gained from you or your designs to compete, nor for benefit of competitors. This is in addition to generic confidentiality terms.
9. Recall process (if & when necessary)
10. Liability Issues (what’s vendor liable for; capped liability for Buyer)
11. Who bears transit costs and risk of loss during shipping/delivery
12. Ensure any “Advances” and/or “Deposits” are contingent upon the vendor meeting specs, and subject to refund
13. Require that all work is to be bespoke, custom and original
14. Insurance requirements
15. Add standard reps & covenants (professional and workmanlike, industry standards, compliance with laws, compliance with self-regulatory standards, good manufacturing practices, responsible for employees & agents, no infringement of IP, able to deliver good title, shelf life /expiration dates are reasonable, etc.)
16. Add standard indemnities for breach (see all other bullet points herein)
17. Consider what Reporting requirements, if any, you need from Seller.
18. Depending on industry and product, if & when any regulation is applicable (eg FDA, FFDCA, etc.), Seller will cooperate and comply
19. Spell out Packaging and labeling requirements
20. Where will products be made (eg China may be more cost effective, but bad reputation for piracy; “made in USA” claim could be valuable, but may cost more)

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In addition, Here are a few aspects to consider WRT manufacturers before selecting which one:

1. Ask for a reference client or two that you may contact.
2. Ask for a trial arrangement (e.g., 3 months duration under which you see how they deliver).
3. Consider pros/cons WRT protecting formulas via patent, trade secret, etc (talk to IP attorney).?

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