5 Main Terms to Negotiate with your Contract Manufacturing Agreement
Finding a contract manufacturer (CM) for your product is one step of the new product introduction (NPI) journey. A major step after selecting your CM is to negotiate your contract manufacturing agreement. Making changes to the contract is very common so don’t be nervous to negotiate. No matter which supplier you work with, you should pay close attention to the following terms.
Price, Payment Terms & Minimum Order Quantities (MOQ)
These three parts, price, payment terms, and MOQ will be the most common parts of any agreement you sign with your contract manufacturing partner.
Minimum order quantity (MOQ) is the minimum amount of units you need to purchase for one purchase order (PO). You will also have a quote along with the MOQ.
You should also prepare your company to grow and expand. To grow, you will need to purchase higher volumes and you will need to know what volumes you can receive price breaks at.
Here is a quick example with an MOQ of 1,000 units.
An order of 1,000 units will cost $12.25/unit
An order of 10,000 units will cost $11.75/unit
An order of 50,000 units will cost $10.00/unit.
The payment terms will dictate when you need to pay your supplier. If you are a startup with no credit history, expect to pay a larger amount as a downpayment and most likely the balance on shipment.
However, if you have established trust with credible payment history, you can negotiate more favorable payment terms, such as the following:
Downpayment of 30% on acceptance of the PO
20% paid on the date of shipment
50% paid 30 days after receiving the goods.
If you know how to negotiate with your supplier and have established credit history, you might be able to pull off the following:
Downpayment of 0% on acceptance of the PO
0% paid on the date of shipment
100% paid 30 days after shipment or NET30.
One extra thing to add, expect to see a clause about the fluctuation in the exchange rate. For example, if the exchange rate fluctuates + or - 5% from today's exchange rate (the day the contract is signed), the supplier has the right to re-quote the product.
There might also be something similar for raw material prices. However, this is harder to quantify because you might not know what your raw material prices are.
Mutual Cooperation
There are a few different parts that can be included with mutual cooperation. The two we find most often are engineering support and visits.
Engineering Support:
This clause states the CM shall provide the client with engineering support for the effective duration of the contract. The CM will also dedicate the necessary amount of engineering hours for design for manufacturing and assembly (DFMA), cost-down projects, product development, and more.
Visits:
This states the buyer will be able to visit the CM and also all of the sub-contractors hired by the CM. Make sure the CM is transparent about you being able to visit sub-suppliers, if necessary.
Scheduling
For a new product, a successful product launch is very important. You and your CM might be approaching the production schedule and shipment date from two different directions, which is totally OK. You most likely want to launch your product ASAP. Your CM, on the other hand, wants to confirm the prototype, work instructions (WIs), quality requirements, and more before they promise a specific shipment date.
When your CM is comfortable with committing to a production schedule, it is important to hold them to their word. The most common example of this is introducing a price reduction if they are late by X amount of days.
For example, you can structure the price reduction the following:
Number of Days Late | Unit Price Reduction |
14 days or less | No price reduction |
15-28 days late | 4% reduction |
29-42 days late | 8% reduction |
More than 43 days late | 12% reduction |
Another common method would be to request your CM to pay for any shipments that are past the original shipment date. For example, if you planned to ship by sea, but your CM was 40 days late and now you need to ship via air, you can negotiate with your supplier to pay a certain amount of the air freight costs.
Tooling
Tooling can be broken down into a few different components: ownership, payment terms, and tooling list.
Tooling Ownership:
This should state that upon completion of payment, the buyer should have ownership of all of the tools and fixtures required to produce the product.
Payment Terms:
Similar to the product’s payment terms, you will want to have defined payment terms for the tooling as well. An example of payment terms for tooling are the following:
60% paid upfront upon acceptance of the tool design and specifications.
40% payable on the confirmation of the samples.
Tooling List or Tooling Register
There are multiple different names for this. However, what it means is that your CM will create and maintain a tooling list that will provide the tooling or fixtures name, its purpose, location, tool life, and some other details.
Warranty
The warranty clause will be an important part to ensure you are protected past initial delivery. The warranty will state that the CM will be responsible for any manufacturing defects that occur within a certain period of time. The CM can only be responsible for manufacturing defects and those do not include any misuse of the product, improper maintenance or repair from the user or a third party, normal wear and tear, and more.
It is important to state the actions required if a product fails or breaks within the warranty period. You should try to negotiate the following:
Replacement of the goods
Repair of the goods
Payment of the costs of replacing the goods
Payment to have the goods repaired or replaced
Negotiating your contract is an important step to bringing your product to life and also protecting your product. If you are interested in partnering with a contract manufacturer that has your best interest in mind, send us an email to Hello@EPowerCorp.com. We would be happy to talk.