Contract terms for custom manufacturing: quality, delivery, IP and liability

What the contract has to do

A custom manufacturing contract is not a general terms page. It is the document that answers the questions a purchase order cannot: which drawing revision is current, how a batch is accepted, what happens when it fails, who owns the tool and how the price changes when metal moves.

Most disputes do not start with a bad intention. They start with an assumption. The buyer assumes the supplier will hold the tolerance in the title block. The supplier assumes the buyer will accept a small deviation because the drawing was unclear. The contract should remove those assumptions before they become expensive.

Keep the document specific to the part and the programme. A long template copied from another customer often contains clauses that neither side can operate. A short contract with clear annexes is easier to enforce and easier to use.

Scope, drawings and revision control

Name the part, the drawing number and the revision. State that the supplier works only to the revision listed in the purchase order, and that any other revision needs a written change. Attach the drawing to the contract and keep a controlled copy.

Define what happens when the drawing changes. Who pays for the tool modification, who owns the new tool, how the price is adjusted and how the first article is repeated. A change clause that says only that the parties will agree is not a clause, it is a delay.

Include the CAD file, the step file and any specification the drawing refers to. If the part must meet a standard, name the standard and the edition. If the buyer supplies the material, say so, and define who carries the risk of a material defect.

Revision control is also a records question. The supplier should keep the production drawing, the inspection record and the material certificate for the agreed period. If a recall or a field failure occurs, those records are the only way to trace the batch.

Quality and acceptance

State how the part is accepted. For many custom parts the acceptance method is a first article inspection followed by a sampling plan on production. Name the standard, the sample size and the acceptance number, or attach a control plan that does the same job.

Define the inspection responsibilities on both sides. The supplier inspects before shipment and provides the record. The buyer may inspect on receipt, and a defined period for raising a non-conformance prevents claims that arrive months later. If the buyer does not inspect within the period, say whether the batch is deemed accepted or whether the right survives.

Agree the handling of a non-conformance. The supplier should be able to contain, sort and replace within a stated time. The buyer should be able to reject, return or accept with a concession. A concession needs a written deviation, a defined quantity and a price adjustment where relevant.

Include the cost of a quality failure. Sorting, rework, return freight, expedited replacement and line stop costs can all be claimed if the contract says so. Without a clause, the buyer is often limited to the value of the goods.

Delivery, capacity and delay

State the delivery date, the quantity, the Incoterm and the place. A date without a place and an Incoterm is not a delivery term. State whether partial shipments are allowed and how they are called off.

Define the capacity commitment. A supplier that quotes a lead time of six weeks may not be able to hold it when its order book fills. A capacity clause can reserve a monthly volume and a ramp, in exchange for a forecast commitment from the buyer.

Deal with delay explicitly. A liquidated damages clause can compensate the buyer for a late delivery, but it should be proportionate and it should not replace the right to terminate for a persistent failure. Force majeure should be narrow and should require notice and evidence, not a general escape.

For an imported part, the delivery term should also cover the documents. A shipment that arrives without the certificate of origin or the inspection certificate can be delayed at customs even when the goods are correct.

Price, currency and the metal index

A fixed price is simple for a short programme and risky for a long one. Metal, energy and currency move. A price clause that ignores them will be renegotiated at the worst moment, usually when the supplier is already late.

A common structure is a fixed conversion charge plus a material price linked to a published index. The contract should name the index, the reference period, the frequency of review and the evidence the supplier must provide. It should also define what happens when the index moves beyond a stated band.

Currency is a separate clause. If the contract is in one currency and the supplier buys material in another, the exposure sits somewhere. State who carries it and how often the rate is reset. A quarterly or monthly reset is easier to administer than a spot rate on every invoice.

Tooling should be priced separately. If it is amortised into the unit price, say so, state the amortisation period and state what happens if the volume falls short. A tooling line that is buried in the piece price is hard to prove and hard to recover.

IP, tooling and confidentiality

Define ownership of the drawing, the specification, the tool design, the process know how and any invention made during the programme. The default position should be that the buyer owns the drawing and the tooling it paid for, and the supplier owns its pre existing process knowledge.

A licence clause is often needed. The supplier may need a licence to use the buyer's drawing to make the part, and the buyer may need a licence to use the supplier's process knowledge if the tool moves. Keep the licence narrow and tied to the programme.

Tooling terms should cover the register, the marking, the maintenance, the access right and the return on termination. The contract should also say what happens to the tool if the supplier becomes insolvent, and whether a third party holds a copy of the records.

Confidentiality should cover the drawing, the volumes, the prices and the fact of the programme. A mutual clause is easier to sign than a one sided one, and it is more likely to be enforced.

Liability, remedies and exit

A liability cap is normal, but the cap should be high enough to cover a realistic failure and should not apply to fraud, wilful misconduct or a breach of confidentiality. A cap set at the value of one shipment is not much protection for a part that stops a production line.

Define the remedies in order. Repair, replacement, credit, rework at the buyer's site, then termination. A clear sequence lets the buyer act without waiting for a legal opinion, and it gives the supplier a chance to fix the problem.

Include a termination right for convenience with a notice period, and a termination right for cause with a cure period. On termination, the supplier should deliver the finished goods, the work in progress, the tooling and the records. A termination clause that does not cover the handover is incomplete.

Finally, agree the governing law, the dispute forum and the language. For a cross border contract, arbitration is often more practical than litigation because it is easier to enforce in another country. The clause should name the seat, the rules and the number of arbitrators.