Your business is gearing up for a new production partnership. You're all set to sign on the dotted line, but wait... Have you really combed through that contract? 

Because here's the deal: missing even a tiny detail could cost you. So, it’s high time you created a checklist to solve for it.

What makes manufacturing contracts difficult to review

Reviewing manufacturing contracts can feel like navigating a maze. These documents are packed with details that matter a lot. Here's why they're often seen as tough nuts to crack:

#1 They have complex terms

Manufacturing contracts are filled with technical jargon. They cover specifics about products, quality standards, and delivery schedules. For those not on the factory floor daily, this language can be a barrier.

#2 You could get locked into long-term commitments

These contracts often lock you into long-term relationships. Mistakes or oversights can lead to extended periods of inconvenience or financial loss. It's a lot of pressure to get everything right from the start.

#3 There’s a heavy chance the contract doesn’t comply with regulations

Manufacturing involves layers of regulations. Contracts must address these without fail. Missing or misunderstanding a single compliance aspect can lead to legal troubles or fines.

#4 You might face Intellectual Property (IP) risks

Manufacturing contracts touch on IP like designs and patents. Mistakes here can lead to significant losses or disputes over who owns what. And considering that businesses spend $870 billion on dispute resolution annually, you need to ensure that you’re reviewing these contracts right.

#5 They’re lengthy!

These contracts can be lengthy, with each section packed with critical information. Overlooking even a minor detail can have major consequences.

Also read: Mitigating Intellectual Property (IP) Risks with AI

Best practices for reviewing manufacturing contracts

Reviewing manufacturing contracts is key to safeguarding your business interests and ensuring successful partnerships. Here's how you can approach this critical task effectively:

#1 Pay attention to the scope and deliverables

This goes without saying but you must have a crystal-clear understanding of what is being agreed upon. This means ensuring the contract includes a detailed description of the products or services, with specifics on quality, specifications, quantities, and delivery timelines. 

• Start with a comprehensive checklist: Create a checklist that covers every aspect of the product or service being manufactured. This should include quality requirements, specifications, quantities, and delivery timelines. Use this as a guide to ensure nothing gets overlooked during your review

• Ask for samples or prototypes: Request samples or prototypes if applicable. This is especially useful for products with specific quality or design requirements. Comparing these samples against the contract specifications can help ensure alignment between what's agreed upon and the actual output

• Schedule regular review meetings: Set up periodic review meetings with the manufacturer. These meetings can serve as checkpoints to discuss the progress, address any concerns related to the scope or deliverables, and make adjustments as necessary

• Include a change management process: Outline a clear process for managing changes to the scope or deliverables. This should cover how changes can be requested, approved, and documented, ensuring both parties are aligned on any modifications to the original agreement
• Ensure understanding and agreement: Before finalizing the contract, ensure that both parties have a shared understanding of the scope and deliverables. This might involve clarifying technical terms or industry jargon to prevent any assumptions or misinterpretations

#2 Assess pricing and payment terms

Dive into the details of the pricing structure and payment schedules. Make sure these terms are not just clear, but also fair. 

• Dissect the pricing model: Understand whether the pricing is fixed, per unit, or based on time and materials

• Ask for a breakdown: Request a detailed breakdown of costs, including any materials, labor, and overheads. This transparency can help identify any potential for cost savings or negotiation.

• Clarify payment milestones: Identify if payments are tied to specific milestones, deliveries, or project phases

• Negotiate terms: If the proposed payment schedule is not favorable, don't hesitate to negotiate terms that better suit your cash flow needs.

• Check for hidden fees: Be on the lookout for any hidden fees, such as setup charges, minimum order quantities, or rush fees. Ensure these are discussed and clearly outlined in the contract.

• Agree on payment methods: Determine the preferred payment method (e.g., bank transfer, credit, etc.) and ensure it is included in the contract

• Tie payments to quality and delivery: Consider including clauses that link part of the payment to meeting quality standards or delivery timelines. This can provide additional assurance that the products will meet your expectations.

#3 Verify quality control measures

The contract should clearly outline the quality standards expected and compliance with relevant regulatory requirements. It should detail the inspection processes and what happens if products don't meet the agreed standards.

• Specify quality standards: Clearly define the quality standards that the products must meet. These could be industry standards, regulatory requirements, or your own company's specifications. Be as specific as possible to avoid ambiguity
• Reference standards: Where applicable, reference specific industry or international quality standards (e.g., ISO certifications) that the manufacturer must adhere to
• Detail inspection stages: Outline when and how inspections will occur. Will there be inspections at various production stages or only on the final product? Who will conduct these inspections, and what criteria will they use?
• Agree on inspection rights: Ensure the contract grants you or your representatives the right to inspect the manufacturing facilities and the production process, if necessary
• Set clear consequences: Define what will happen if the products do not meet the agreed-upon quality standards. This might include rework at the manufacturer's expense, rejection of the batch, or financial penalties.
• Outline the remediation process: Include a process for addressing and rectifying quality issues. This should detail how defects will be reported, timelines for correction, and how re-inspections will be conducted.
• Identify relevant regulations: Make sure the contract specifies compliance with all relevant local, national, and international regulations. This could relate to product safety, environmental standards, labor laws, etc.
• Require documentation: Insist on receiving copies of any certifications or inspections reports that demonstrate compliance with these regulations
• Adapt to changes: Allow for the contract to be updated to incorporate new quality standards or regulatory requirements that may arise over time

#4 Protect intellectual property

IP is often a core asset. Ensure the contract has provisions to protect your IP rights, including designs, patents, and trademarks. 

• Catalog your IP: Start by identifying all IP assets involved in the manufacturing process. This includes patents, trademarks, designs, trade secrets, and any other proprietary information
• Specify ownership: Clearly delineate which IP assets are owned by your company, ensuring there's no ambiguity about ownership before, during, and after the contract term
• Define IP usage: Clearly outline how your IP can and cannot be used by the manufacturer. This includes specifying the purposes for which your IP is being licensed and any limitations on its use
• Incorporate confidentiality agreements: Ensure the contract includes strict confidentiality clauses to protect sensitive information and trade secrets shared during the manufacturing process
• Outline enforcement actions: Specify the steps that will be taken if your IP rights are violated, including legal actions and penalties. Make sure the contract spells out your rights to seek injunctive relief and damages
• Regular monitoring: Agree on mechanisms for monitoring and enforcing IP rights, including how infringements will be identified and addressed
• Control subcontracting: If the manufacturer will use subcontractors, include provisions to ensure your IP rights are protected downstream. Require your approval for any subcontracting and extend IP protection clauses to cover all subcontractors
• Secure IP post-contract: Include terms that detail the handling of your IP once the contract ends or is terminated. This should cover the return or destruction of IP materials and ensure that the manufacturer ceases any use of your IP
• Consider international protections: If manufacturing involves multiple countries, ensure your IP protection aligns with international laws and treaties. This may involve securing IP rights in countries where your products will be manufactured, sold, or both.

#5 Enforce confidentiality

Confidentiality clauses are critical to protect your trade secrets and proprietary information. These clauses ensure that sensitive information shared during the manufacturing process stays protected.

• Specify what’s confidential: Clearly delineate what constitutes confidential information in your contract. This could range from product designs and manufacturing processes to customer lists and pricing strategies
• Inclusion of all forms: Ensure that confidentiality covers all forms of communication, including written, oral, and electronic
• Outline obligations clearly: Detail the obligations of the manufacturer regarding the handling, storage, and protection of confidential information. This includes measures to prevent unauthorized access, disclosure, or theft
• Duration of confidentiality: Specify the time period for which the confidentiality obligations apply, which should extend beyond the termination of the contract to adequately protect your interests
• Limit access: Access to confidential information should be limited to individuals who need it to fulfill their contract obligations. This minimizes exposure and reduces the risk of information leaks
• Training and awareness: Ensure that the manufacturer commits to training their employees about the importance of confidentiality and the specific measures required to protect your information
• Immediate notification: The contract should require the manufacturer to immediately notify you in case of any breach or suspected breach of confidentiality
• Remedial actions: Define the steps to be taken in response to a breach, including investigation, remediation, and any legal actions to enforce the contract and protect your rights
• Post-contract protocol: Include provisions for the return or secure destruction of confidential materials upon the end of the contract or at your request. This ensures that sensitive information does not remain with the manufacturer unnecessarily
• Supplement with NDAs: Consider using separate non-disclosure agreements (NDAs) for additional layers of protection, especially when disclosing confidential information before a full contract is signed
• Specify consequences: Detail the legal and financial consequences for violating confidentiality obligations. This could include damages, injunctive relief, and other penalties, providing a strong deterrent against breaches
• Conduct audits: Agree on the right to conduct regular audits or reviews to ensure compliance with confidentiality provisions

#6 Review termination and renewal clauses

Understand the conditions under which the contract can be terminated or renewed. These clauses give you an exit strategy if things don't go as planned and provide options for continuation if both parties are satisfied with the partnership.

• Identify specific triggers: Clearly outline the conditions under which either party can terminate the contract. This might include breach of contract, failure to meet quality standards, or financial instability
• Set clear notice periods: Specify the amount of notice required to terminate the contract, allowing both parties sufficient time to adjust their plans
• Outline the process: Detail the steps required to terminate the contract. This includes who needs to be notified, how to notify them (e.g., in writing), and any final obligations or settlements
• Address the handling of unfinished goods: Agree on what happens with in-progress work or materials already paid for. Will they be delivered, and if so, how will they be priced?
• Consider the impact on subcontractors: If your manufacturer uses subcontractors, understand how termination affects these relationships. Ensure that your interests are protected in any subcontracting arrangements
• Automatic vs. negotiation renewal: Determine whether the contract will automatically renew or if renewal requires negotiation. Set deadlines for renewal discussions to avoid last-minute decisions
• Adjust for future conditions: Allow terms for adjusting contract conditions upon renewal, reflecting any changes in business needs, market conditions, or regulatory environments
• Confidentiality post-termination: Ensure that confidentiality obligations continue after the contract ends. This protects sensitive information even when the business relationship is over
• Include exit strategy for both parties: Mutual convenience termination: Consider clauses that allow for termination by mutual agreement if the partnership is no longer beneficial
• Early termination fees: If applicable, discuss and define any early termination fees to compensate for sudden contract end

#7 Consider dispute resolution mechanisms

Even with the best planning, disputes can arise. The contract should specify how disputes will be resolved, choosing between arbitration, litigation, or other methods. It should also clarify the jurisdiction under which disputes will be settled.

• Understand your options: Familiarize yourself with the advantages and disadvantages of various dispute resolution methods, such as negotiation, mediation, arbitration, and litigation. Each has its own set of benefits and is suitable for different types of disputes
• Match the method to the situation: Consider the nature of potential disputes that might arise and choose a method that is appropriate for those situations. For example, arbitration might be preferred for its confidentiality and speed, whereas litigation might be necessary for more complex legal matters
• Outline the steps: Clearly define the process for each dispute resolution method. For negotiation or mediation, specify how parties will initiate the process, choose mediators, and the expected timelines. For arbitration or litigation, detail how arbitrators or courts will be selected, the rules governing the proceedings, and how decisions will be enforced
• Timeline for resolution: Include a timeline or deadline by which disputes should be resolved, encouraging prompt resolution and minimizing disruptions to your business
• Determine jurisdiction: Explicitly state the jurisdiction under which disputes will be resolved. This is particularly important for international contracts where parties may be based in different countries with different legal systems
• Specify governing law: Clearly identify the body of law that will govern the contract and resolution of disputes. This helps ensure consistency and predictability in how disputes are handled
• Maintain privacy: If confidentiality is a concern, include provisions that ensure the dispute resolution process is conducted privately. For arbitration, specify that the proceedings and outcomes are not to be disclosed to third parties
• Address cost allocation: Discuss and agree on how costs associated with dispute resolution (e.g., legal fees, arbitrator fees) will be allocated. This can be split evenly, charged to the losing party, or another arrangement that suits both parties
• Encourage initial negotiation: Before escalating to formal dispute resolution processes, require that parties attempt to resolve disputes through good faith negotiation. This can often lead to quicker, more amicable resolutions and preserve business relationships

Also read: Finding Common Ground: How to Resolve Contract Disputes

Contract review checklist for manufacturing contracts

Ready to take the guesswork out of your contract review process? This invaluable resource is below.

Check out this free checklist and arm yourself with the tool you need to navigate manufacturing contracts with confidence.

To get the most out of this checklist, here are some practical tips:

• Use the checklist as a pre-negotiation tool to identify areas that may require amendments or more detailed discussions
• While the checklist covers a wide range of concerns, consider adding specific items relevant to your business or industry
• Share the checklist with your procurement team as well. Collaboration can provide a more comprehensive review and ensure all concerns are addressed

Reviewing and negotiating your manufacturing contract

Reviewing and negotiating your manufacturing contract is key. You need to be sure you're not missing anything. Here's how to tackle it with confidence and ensure nothing slips through the cracks:

• Start with some preparation: Before you dive in, know what you need. Identify the must-haves and the areas where you can compromise. For instance, if timely delivery is critical, mark it as non-negotiable
• Review with attention: Every line matters. Pay special attention to sections on pricing, delivery schedules, and IP rights. For example, if the contract's IP section seems vague, it's time to ask for more clarity
• Speak up: If something doesn't look right, say it. Be clear about what you want changed. Saying, "We need more specific quality control measures," is better than a general complaint about product standards
• Seek win-win solutions: Negotiation is not about winning; it's about finding a common ground. If a clause seems too rigid, suggest an alternative that works for both. It's about partnership, not just paperwork

Finally, use technology!

Don't do it all alone. VerifAI by SpotDraft can make your contract review process easier and more thorough. It helps catch things you might miss and speeds up the review process.

VerifAI functions as a Microsoft Word plugin, which means it integrates seamlessly into the software many legal professionals use daily. This integration allows you to use VerifAI's features without disrupting your workflow or needing to switch between applications. You can analyze contracts right within MS Word, making the review process as straightforward as possible.

VerifAI respects the unique expertise, judgment, and empathy that legal professionals bring to their work. It enables you to use plain English to codify your approach into customized review guidelines.

Instantly highlight non-compliance and key risks

With VerifAI, you can immediately identify areas of non-compliance and potential risks within your contracts. The add-in highlights these issues directly in the document and provides source references for each guideline, making it easy to understand why certain sections may not meet your criteria.

AI power-ups: suggestions, redlines & comments

VerifAI leverages the collective knowledge of top lawyers to suggest language improvements, add comments for clarity, and make edits in track changes. This feature is invaluable for quickly incorporating your position into the contract and explaining changes to the counterparty or other reviewers.

Also read: Installing VerifAI to Microsoft Word

On your way to master manufacturing contract review

Reviewing manufacturing contracts can seem like a tough puzzle to solve. They're packed with tricky language, long-term commitments, and risks you need to watch out for. But with careful attention to detail and the right tools, like our free contract review checklist and VerifAI, you can navigate these contracts with confidence. 

Remember to speak up if something doesn't seem right and seek win-win solutions through negotiation. By following best practices and staying vigilant, you'll be well-equipped to protect your interests and pave the way for successful partnerships. 

So, don't let the complexity scare you off—dive in, tackle those contracts, and set yourself up for success!