Supply Agreements

A supply agreement is the commercial contract governing pricing, volumes, delivery and liability between a buyer and a contract manufacturer, distinct from but usually complementary to the quality agreement covering technical and quality responsibilities. This guide sets out the essential clauses a supply agreement should cover.

Pricing and Payment Terms

State the pricing mechanism clearly - unit pricing, cost-plus, or a processing fee, per contract manufacturing costs and pricing models - along with invoicing schedule and payment terms, and any mechanism for price adjustment if raw material costs move significantly.

Volume Commitments

If a minimum volume commitment is agreed, state it precisely along with the consequences of a shortfall - see agreeing minimum order quantities. A volume commitment without clear shortfall terms can become a source of dispute if actual orders fall short of the forecast.

Delivery and Quality Terms

Define delivery terms including an agreed shipping method and responsibility point, along with quality specifications and inspection rights, cross-referenced to the separate quality agreement rather than duplicated inconsistently across both documents - see quality agreements.

Intellectual Property

Address ownership of intellectual property for any custom tooling, formulation or process work, consistent with the terms agreed in intellectual property clauses, rather than leaving this only in a separate document that might conflict with the supply agreement's terms.

Liability and Risk Allocation

Include a liability cap defining the maximum financial exposure either party carries, and consider whether losses such as lost profit or business interruption are excluded, since this significantly affects the practical value of any claim if something goes wrong. A force majeure clause excusing performance during genuinely unforeseeable events is also standard.

Termination

Define whether termination is for cause, for convenience with notice, or only at the end of a fixed term, and specify notice periods and any transition arrangements - such as inventory buy-back or a wind-down period - that apply when the relationship ends. Clear termination terms reduce the risk of disputes if either party wants to exit.

Getting Volume Commitments Right

Volume terms are where supply agreements most often become uncomfortable. Manufacturers want commitment to justify holding capacity and materials; buyers want flexibility. A minimum purchase commitment you cannot meet becomes a liability, while no commitment at all gives you no priority when capacity is tight.

Rolling forecasts with a firm near-term window and indicative longer-term volumes are usually a workable middle position - see managing production forecasts. Be clear what a forecast obliges you to, since forecasts sometimes harden into commitments without either party quite intending it.

Price, Term and Exit

Establish how price responds to raw material movement - fixed for a period, indexed, or reviewed at intervals with a defined mechanism. An agreement stating price is fixed without addressing input costs tends to be reopened anyway, so a mechanism is more durable than a number.

Termination provisions deserve attention because switching is slow. Notice periods should be long enough to qualify an alternative manufacturer, and the agreement should cover what happens to your materials, finished stock, tooling and documentation on exit - see transferring production between manufacturers. Securing rights to your specifications and validation data at the outset is far easier than requesting them on the way out.

Questions to Ask a Manufacturer

• Do you have a standard supply agreement template, or do we need to draft one jointly?
• What are the consequences if we fall short of an agreed volume commitment?
• What liability cap do you propose, and what losses are excluded?
• What notice period and transition process applies if either of us wants to end the agreement?

Frequently Asked Questions

Related Guides

• Quality agreements
• Agreeing minimum order quantities
• Intellectual property clauses