Contract Manufacturing Agreements: Why Experience Matters

Working with your sourcing agent to choose which Chinese factory you will use to source your product manufacturing needs is a big decision. In making your selection, there are several issues that should be addressed up front and worked in to the manufacturing agreement. It is essential that your sourcing company is familiar with potential pitfalls and takes the proper precautions to avoid them.

Contract With the Right People

Product sourcing to China involves a lot of detail and a thorough understanding of the process. Experience and communication are invaluable and enable your sourcing company to produce a solid contract for your protection. Unfortunately, many U.S. buyers have entered into contract with the wrong party. It is common for an agreement to take place with a sales subsidiary, and not the actual contract manufacturer that owns the factory. In the event of a product defect, the buyer would not have any legal recourse against the actual manufacturer.

A reliable sourcing agent will do a thorough background factory check, ensuring that the factory has a good track record, is financially stable and is Chinese registered.

Your sourcing agency should also be Chinese registered. Contracts between two Chinese registered entities are much more enforceable, making it easier to resolve a dispute and reinforce the terms of your agreement. It’s also important that your agency has a local presence in China with experienced, bilingual staff that understands the process and can accurately communicate and execute documents.

Molds, Materials and Pricing

An experienced sourcing agent will always stipulate that you own your molds and tooling at all times and include a liquidated damage provision should the factory not return them when requested or return them in poor condition. If they are being transferred from another factory, your agent may also recommend requesting a deposit.

The bill of materials (BOM) is extremely helpful in the prototyping process and is an important piece of a well-written contract manufacturing agreement. A detailed sourcing agent will ensure that the BOM is followed during the production run, preventing the possibility of a manufacturer substituting in lower quality materials that could affect the integrity of your product.

Inflation and labor costs are always fluctuating making it common for a manufacturer to approach you with revised pricing at some point during production. Should this happen, you can expect your sourcing company to request and verify the reason for the adjustment. When a price is proposed at any stage, your agent should clarify how long the factory will honor that quote.  

Quality Control and Warranty

It is recommended that quality control inspections be performed throughout production, prior to shipping and again once the product has reached its destination. The agreement should include a clear definition of when inspections will take place, what the inspection should entail, and include both the product itself and packaging. Working with a sourcing agency that has a presence in China changes this entire process to your benefit. The agency can perform in-person factory visits and inspections, and has the ability for on-the-spot negotiations. There is no travel required by you as a buyer and no need to rely on a translator. While warranties are uncommon, your sourcing agent can ask for it in an attempt to offer additional protection.

Intellectual Property and Dispute Resolution

Registering your patents, trademarks and copyrights in the U.S., China and any of your other markets is a must, but there are some things that are not covered by registration alone. Your sourcing agent should include a non-disclosure from the very beginning and be cautious of how much they reveal during the quotation process.

Experienced sourcing agents are familiar with the necessary steps needed to protect your intellectual property. The manufacturing agreement should address trade secrets shared or generated during manufacturing, as well as clear boundaries in regards to contracting with competitors. Your agent may also want to define how they will handle the disposal of any defective products to prevent leakage of product information.

Being proactive is the best method for avoiding a messy situation and with your sourcing agent as you advocate, you shouldn’t have to settle for conditions you are not comfortable with. By addressing these matters in advance, your agency can work them into your manufacturing agreement making resolution easier if it does arise.

Asian ProSource understands that this process can be daunting and we are here to help. As your China sourcing agent, we will manage the sourcing process for you from start to finish. We will source several manufactures for pricing quotes and help you make an educated decision on the best fit. Our experienced legal team will draft and negotiate a contract manufacturing agreement that is thorough and accurate with your best interests in mind. Contact us for a free project evaluation and learn more about what we can do for you!