If your startup builds physical products - hardware, wearables, or consumer goods - you need more than a handshake with your manufacturer. A well-drafted manufacturing agreement is essential to protect your product, control quality, and limit liability.
This contract goes beyond costs and timelines. It defines ownership, risk allocation, and dispute resolution - critical safeguards to keep your supply chain from becoming a liability.
Here’s a primer for founders entering their first manufacturing relationship.
What Is a Manufacturing Agreement?
A Manufacturing Agreement is a contract between your company (the buyer) and the manufacturer (the supplier) to produce and deliver physical goods according to agreed specifications.
Startups often use these when outsourcing:
- Consumer products (e.g., smart home devices, fitness gear)
- Hardware components
- Medical devices (with added regulatory obligations)
What Should It Cover?
1. Product Specifications
Be ultra-clear. Your agreement should attach drawings, performance standards, and approved materials. Vagueness = defects.
2. Quality Control
Set testing procedures, inspection rights, and rejection policies. Can you audit the factory? What if 10% of units fail?
3. IP Protection
Your manufacturer shouldn’t be able to replicate your product for someone else. Include:
- Ownership of designs and tools
- Confidentiality clauses
- Non-compete or use restrictions
4. Pricing and Payment Terms
Fixed pricing? Cost-plus? Escalation clauses? Also spell out:
- Payment triggers (deposit, milestones)
- Currency and method of payment
- Penalties for late or defective delivery
5. Lead Times and Delivery
Include clear timelines, shipping terms (like Incoterms), and remedies for delays.
6. Warranties and Liability
What happens if the product breaks or doesn’t meet specs? Who bears the cost of recalls, replacements, or customer claims?
7. Term and Termination
You may want flexibility to switch manufacturers. Make sure you can terminate for cause—or even convenience - with proper notice.
Tips for Working with Overseas Manufacturers
- Consider local law: If your manufacturer is in China, Vietnam, or Mexico, you’ll need to navigate foreign legal systems.
- Use dual-language contracts: Especially for critical clauses like IP, delivery, and dispute resolution.
- Dispute resolution: Think twice about suing in foreign courts—consider arbitration in a neutral location instead.
Final Thoughts
Manufacturing is where ideas meet execution - and where legal gaps can be costly. We help startups structure manufacturer relationships to protect their product, manage quality, and maintain leverage as they scale.
Frequently Asked Questions
FAQs
Why do startups need manufacturing agreements?
They protect your startup by setting clear standards for quality, ownership, liability, and delivery. Without one, you risk disputes, defects, and loss of control over your product.
What happens if a manufacturer delivers defective goods?
Your agreement should outline inspection rights, rejection procedures, and remedies such as refunds, replacements, or penalties.
How can startups protect their IP when working with manufacturers abroad?
Include strict IP ownership and confidentiality clauses, use dual-language contracts, and consider arbitration in neutral jurisdictions to enforce rights.
Can I switch manufacturers if I’m unhappy with the current one?
Yes, but only if your agreement allows it. Ensure your contract includes termination rights and addresses ownership of tooling and designs so you can move production.
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