Not every business has the resources to manufacture their products locally or in-house. Contract manufacturing is a common way that businesses can save on costs, machinery and expertise by outsourcing their manufacturing to another company. This article explains what contract manufacturing is and the legal considerations involved.
What is contract manufacturing?
What are the benefits of contract manufacturing?
Contract manufacturing allows businesses to save on costs, machinery and expertise. By outsourcing manufacturing, your business does not need to build a production facility or employ factory hands. Resources can instead be allocated towards other key areas of your business, such as marketing and sales. Contract manufacturing also allows for economies of scale, as production often becomes more efficient with outsourced manufacturing.
Many businesses enter into manufacturing agreements with overseas companies. Depending on where the manufacturer is located, this can save additional costs on employee wages and training, raw materials and tax. Outsourcing manufacturing to overseas companies can also be a good way to develop your business network and gain entry into international markets.
What are the legal considerations in contract manufacturing?
While contract manufacturing can be advantageous, there are many legal aspects which require careful consideration. By outsourcing manufacturing, you are giving up direct control of how your goods and components are produced and this may come with associated risk. However, these risks can mostly be addressed through a well-drafted and thorough manufacturing agreement.
What is a manufacturing agreement?
A manufacturing agreement is a legally binding agreement between your business and the contract manufacturer. It will set out the rights and obligations of both parties to the agreement, and help to limit your liability. For example, a manufacturing agreement may cover items such as:
- Intellectual property: Who has rights to your trade marks, patents and designs? Are these licensed and what happens if your rights have been infringed?
- Timeframe: What date do the goods or components need to be manufactured by and what are the consequences if the deadline is not met?
- Exclusivity: Is the manufacturing agreement exclusive or can the manufacturer produce goods or components for another business?
- Sub-contracting: Can the manufacturer sub-contract its work to third parties?
- Payment: What is the cost agreement for manufacturing services? What is the payment method, deadline for payment and consequences for failure to pay?
- Quality assurance: What happens if there are any defects in the manufactured goods?
- Ethical standards: What are the working conditions for employees of the contract manufacturer?
- Jurisdiction: What laws govern your manufacturing agreement? Are both Australian and international lawsapplicable?
- Contract manufacturing occurs when you enter into an agreement with another company to produce goods or components for your business over a specific timeframe.
- Outsourcing manufacturing can help businesses save on time, costs, machinery and other resources. It can also help you break into international markets.
- Many risks associated with contract manufacturing can be addressed through a well-drafted manufacturing agreement.
- A manufacturing agreement is a legally binding contract between your business and the manufacturer. It helps to clarify the rights and obligations of each party and limit your liability.
How can Gladwin Legal help?
Gladwin Legal are experts in commercial and retail law. We can help you with:
- Drafting a tailored manufacturing agreement to help limit your liability
- Reviewing your current manufacturing agreements
- Providing legal advice on your manufacturing and supply arrangements
This article was written by Ruth Ong.