Co-Manufacturer Contracts and Operational Risk

You, if you paid for it. Even when the tooling physically lives at the co-manufacturer's plant, your contract should establish that you own the tooling — molds, dies, plates, custom equipment — with a documented tooling schedule listing cost, unique identifier, and current location. Include the right to relocate on termination. The most common transition dispute is over tooling: the outgoing co-man claims ownership, demands buy-back at inflated value, or refuses to release physical possession. Documented ownership in the contract prevents all three.

For established relationships doing $1-5M annual volume, typical language allocates monthly units committed at approximately 80% of trailing 6-month run rate, with 60 days notice for material forecast changes. At scale ($5M+ annual), capacity commitment often rises to 90% of trailing 6-month run rate with a right of first refusal on additional capacity. For launch phases, capacity commitment is typically limited to first-run confirmed and second-run negotiated. "Commercially reasonable efforts" without a specific unit commitment is not a capacity clause — it is a courtesy that will be deprioritized when a larger customer's order arrives.

Minimum product liability of $2-5M with the brand named as additional insured is standard; higher limits ($5-10M+) for higher-risk categories (supplements, cosmetics with regulated claims, ingestible food). General liability of $1-2M. Workers' compensation per state requirements. Property insurance covering brand-owned tooling and materials at the co-man facility. Some brands additionally require product recall insurance ($1-5M) for regulated categories. Certificates of insurance should be attached to the contract and renewed annually with brand-notified verification.

Liability caps should be tied to your annual purchase volume — typically the trailing 12-month purchase amount or 2-3x annual purchase — not to a nominal fixed dollar amount. Fixed caps at $50K or $100K are inadequate for any meaningful volume, because they do not cover recall exposure. A single class-II recall routinely costs $500K-2M in destroyed inventory, retailer chargebacks, brand damage, and legal fees. Carve out from any liability cap: gross negligence, willful misconduct, IP infringement, breach of confidentiality, and indemnification obligations. Discuss adequate limits with your legal counsel based on your category and volume.

Standard commercial terms are 1-3 years with 60-90 day termination notice. Longer terms (3-5 years) should trade for specific, valuable commitments: lower per-unit pricing, protected capacity, tooling investment, or dedicated line. A long-term contract with no performance escape is asymmetric risk. Avoid auto-renewal without affirmative opt-out. If auto-renewal is in the contract, add a calendar reminder to your team for 120 days before renewal so you can either affirmatively renew or provide required termination notice.

A useful force majeure clause enumerates specific events (natural disaster, government action, labor stoppage, pandemic-related restrictions), requires prompt written notice, requires mitigation efforts, suspends performance obligations but does not eliminate them, and gives either party the right to terminate if the event extends beyond a defined period (typically 60-120 days). Watch for one-sided language that excuses the co-manufacturer's performance while requiring your continued purchase obligations, or clauses that treat ingredient shortages as force majeure — which effectively shifts all raw-material price risk to you.

The most common red-flag clauses: exclusive dealing without defined scope (prevents you from working with other co-mans on non-competing categories), automatic renewal without notice-based opt-out, price escalation formulas the co-man controls unilaterally, minimum purchase requirements without reciprocal performance obligations, consequential damages waivers without carve-outs for gross negligence and IP infringement, change control that requires co-man approval for your own formula changes, and unlimited co-man discretion on production location. Each of these shifts risk asymmetrically toward the co-man and should be renegotiated or struck.

Standard wind-down language provides that you purchase remaining raw materials at cost, work-in-process is completed and delivered, and finished goods are your inventory to receive. Payment terms on wind-down inventory should mirror ongoing commercial terms. Include a defined transition period (typically 60-90 days) during which the outgoing co-man continues production support, provides technical documentation to the successor, and cooperates on tooling relocation. Without documented wind-down provisions, transitions become negotiations at exactly the moment when leverage has shifted away from the departing party.