Monday, November 3, 2014

Contract Manufacturing Agreement

As mentioned in the book “Make It Big, Crossing the Entrepreneur’s gap, Contract Manufacturers are one of the most important partners for scaling a startup.  Production levels increase as the entrepreneurial team begins to move past the start up phase and into scale up.  

This is where contract manufacturing can help.  Many firms are experts and procuring components and assembling products per the startup’s specifications.  Entrepreneurial designers can contact contract manufacturers directly to being this discussion.  From start to launch, the CM engagement process takes about six months or more so starting as soon as possible is important.
The contract manufacturing agreement below is a fairly standard set of terms governing these types of relationships.  Often a CM will have their own contract to start with, and other times not.  So, it is useful to be aware of many relevant terms and have an agreement template work off of.  Startup companies have used the following template to negotiate contract manufacturer agreements.  We offer the template to highlight some key terms and issues that may arise in a contract manufacturer relationship.  Of course, the terms should be modified to suit the business situation.
"I have used a variation of this agreement to initiate production with a contact manufacturer in Malaysia, Singapore, and China," say Marc Theeuwes, former Director of Engineering and Operations, and now Consulting Associate Professor at Stanford University, "these terms are applicable for both Tier I and Tier II contract manufacturers and apply for most overseas and domestic environments."
The reader should feel free to modify this template to meet the unique needs of the startup, product, and contract manufacturer.  The book “Make It Big, Crossing the Entrepreneur’s Gap” discusses many of the partnerships necessary to cross the gap.  Whether in the startup phase of entrepreneurship or the scale up phase, selecting helpful partners is critical to crossing the gap.  The book highlights a number of helpful methods of which contract manufacturing is one.

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Contract Manufacturing Agreement Template
This Manufacturing Services Agreement (the “Agreement”) is dated as of ________________, by and between Contract Manufacturer (“CM”) ______________________________, and _____________________________ (“Customer”).
WHEREAS, CM is in the business of providing manufacturing services that include the custom manufacture of electronics products; and
WHEREAS, the parties desire to establish the terms and conditions that will apply to Customer’s purchase of certain medical monitoring devices (the “Product(s)”) to be manufactured by CM for Customer.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows:
  1. Definitions:
1.1.    Confidential Information:  The technical information, know-how, technology, formulae, system, designs, prototypes, ideas, inventions, improvements, layouts, software, concepts, techniques, discoveries, data, files, supplier and customer identities and lists, accounting records, forecasts, project management plans, marketing plans and business plans relating to this Agreement to which Customer, CM or any licensor or supplier to them has proprietary rights, and all copies and tangible embodiments thereof (in whatever form or medium) conspicuously indicated as proprietary information, confidential information or a substantially similar legend indicating that the information is not generally known by the public, including, but not limited to, Licensed Know-How; provided, however, that any of the foregoing shall not be considered Confidential Information if the recipient can show that it: (i) has become publicly known through no wrongful act or breach of any obligation of confidentiality on the recipient’s or any third party’s part; (ii) was rightfully received by the recipient from a third party not in violation of any contractual, legal or fiduciary obligation by such third party; (iii) was approved for release by written authorization by the party having rights therein; (iv) was independently developed without use of Confidential Information; or (v) was disclosed by court order or other legal authority, provided that the party having rights therein is given an opportunity to oppose such disclosure and if disclosed, such information is only used for the specified legal purposes.
1.2.    Minimum Order Quantity (“MOQ”):  The quantity of components or raw materials ordered by CM and used in the manufacture of the Product(s) that represent either the minimum quantity of raw materials that CM is required to purchase from a given supplier or the minimum quantity necessary in order for CM to provide Customer with pricing that meets Customer expectations.
1.3.    Intellectual Property Rights:  All copyright rights, trademark rights, patent rights, trade secrets, moral rights, right of publicity, right of privacy, authors’ rights, goodwill and all other intellectual property rights as may exist now and/or hereafter come into existence and all renewals and extensions thereof, regardless of whether such rights arise under the law of the United States or any other state, country or jurisdiction.
1.4.    Licensed Know-How:  Customer’s Specifications, trade secrets, and any other designs, documentation, drawings, test information, data and information with respect to design and manufacture of the Products which is proprietary to Customer and provided to CM for manufacture of the Products.
1.5.    Long Lead-Time Components (“LLTC”):  Components or raw materials used in the manufacture of the Product(s) that require a longer time to manufacture or obtain than the time from purchase order acceptance to production start date.
1.6.    Non-Cancelable, Non-Returnable (“NCNR”):  Components deemed Non-Cancelable and Non-Returnable by a CM supplier, and which, once purchased by CM, cannot be returned to such supplier.
1.7.    Release:  The Customer order to CM, whether by written or electronic means, for committed delivery dates and quantities of Product(s), at agreed upon prices, for a specified period of time.
1.8.    Specifications:  The specifications for the Product(s) delivered by Customer to CM.
1.9.    Upside:  The percentage increase (set forth below in Section 10) in the quantity of Product(s) that Customer may purchase in excess of the volumes in any Forecast (as defined below) or Release.
1.10.Downside:  The percentage decrease (set forth below in Section 10) in the quantity of Product(s) that Customer may purchase below the volumes in any Forecast or Release.
2. Delivery of Licensed Know-How:  Promptly upon the execution of this Agreement, Customer will deliver to CM the Licensed Know-How, including the Specifications, which shall be deemed accepted by CM upon receipt.  Subject to the provisions of this Agreement and upon CM’s acceptance of Customer Releases, CM shall manufacture the Products with the agreed upon EOQ in accordance with the Specifications.
3. Agreement to Manufacture:  During the initial term and any subsequent terms hereof, CM agrees to manufacture, sell and deliver to Customer and Customer agrees to purchase and accept from CM finished Product(s) listed in Exhibit A.  During the initial term hereof, the Product(s) shall be specified in Exhibit A hereto and prices shall be set forth in Exhibit B hereto.  Said Product(s) and prices shall continue in effect for subsequent terms hereafter unless modified pursuant to this Agreement.
3.1.    New Products:  Customer may add new Products to Exhibit A upon acceptance by CM.  Customer and CM agree, in good faith, to mutually review such new Products and assess CM’s capability to manufacture such new Products.  New Products and new pricing accepted by CM shall be added to Exhibit A and Exhibit B, accordingly, without the need for further amendment of this Agreement and shall be subject to this Agreement unless otherwise agreed to in writing by CM and Customer.
3.2.    Security Measures:  At all times during the term of this Agreement, CM shall take all security measures in accordance with industry standards, including but not limited to the minimum security provisions set forth in Exhibit E.
4. Pricing:  Prices for the Product(s) shall be agreed to and paid in U.S. dollars, are exclusive of freight costs, taxes and duties, and are subject to periodic review.  Any freight costs, taxes or duties applicable to the sale of the Product(s) by CM to Customer shall be paid by Customer.
4.1.    Customer Initiated Cost Reductions:  Any cost reduction initiated by Customer shall be fully realized by Customer as reflected in the adjusted invoice price of the shipment of said cost reduced Products.  The timing of new Product pricing and its application will be mutually agreed by the parties.
4.2.    Periodic Price Review:  Customer acknowledges that the prices of the Product(s) set forth in Exhibit B hereto are based in part on CM cost of manufacturing the Product(s), including, without limitation, CM cost of labor, components and overhead.  During the initial term and any subsequent terms hereof and upon Customer’s or CM’s written request, CM and Customer agree to review on quarterly basis, in good faith, the prices set forth on Exhibit B and to make appropriate adjustments to said prices to reasonably reflect any change in CM costs of manufacturing the Product(s).  In particular, if the cost of any component CM uses to manufacture any Product hereunder increases or decreases by more than five percent (5%) from the previously quoted cost of the component at the time of entering into this Agreement (or the time of the latest price adjustment pursuant to this Section, if appropriate), then an agreed upon adjustment shall be made to the price for each unit of the Product incorporating such component cost change only. All such charges shall be agreed upon in writing by the parties.
4.3.    CM Initiated Cost Reductions:  Any cost reduction initiated by CM, after the target price has been met as shown in Exhibit B, shall be fully realized by CM for at least a minimum of 3 months.  At the time of the Periodic Price Review in Section 4.2, CM shall be entitled to retain 50% of CM initiated cost reduction (passing the remaining 50% of the cost reduction to Customer, reflecting a reduction in unit cost of the Products) until the subsequent review, after which 100% of the cost reduction is realized by Customer.
5. Consigned Materials:  Upon reasonable notice to CM and the execution of an appropriate agreement, Customer may supply consigned materials to CM.  Customer agrees that all consigned materials will be delivered to CM in sufficient time and in sufficient quantities, taking into account customary attrition levels, to allow CM to meet scheduled delivery dates for the applicable Product(s).  In the event Customer is not able to provide consigned materials in sufficient time and in sufficient quantities, Customer shall, at its discretion, either allow CM to procure such materials on a turnkey basis in order to meet delivery dates or allow CM to ship Product without the inclusion of such materials.  Customer agrees that all consigned materials shall be in good condition, meet Product(s) specifications, be packaged in a readily usable format and be free of any defects or deficiencies.  Customer shall retain title with respect to all consigned materials, and CM shall not be obligated to purchase any excess consigned material.
6. Lead-times/Forecasts:  Lead-times vary from time to time.  Product lead-time is based on then current manufacturing lead-time as well as raw material lead-time and allocations.  As such, if there are any changes in manufacturing lead-times as well as raw material lead-times or allocations, then Product lead-times may change accordingly.  Customer shall pay for all additional costs associated with expediting the manufacturing of Product, procurement of materials, or delivery of Product due to Customer’s failure to give CM adequate lead-times for the delivery of Product.  Customer shall provide CM with a non-binding forecast monthly detailing Customer’s anticipated Product requirements for the ensuing six (6) month period (“Forecast”).
7. Extraordinary Transportation for Late Deliveries:  If it should reasonably be expected that a shipment of Product(s) will not be delivered on the agreed upon delivery date due to reasons (i) other than those set forth in Section 29 (“Force Majeure”) hereof, and (ii) not caused directly or indirectly by Customer, then CM shall, at its expense and upon Customer’s request, use all reasonable efforts to deliver Product(s) at the earliest possible date.  If it is expected that the Product(s) will not be delivered on the agreed upon delivery date due to reasons caused by Customer, including, but not limited to, reasons relating to consigned or Customer directed material, then Customer shall bear the expense of expediting delivery.
8. MOQ, NCNR and LLTC:  Customer and CM shall agree in writing upon MOQ, NCNR and LLTC lists for components and raw materials.  CM and Customer shall update the MOQ, NCNR and LLTC lists during quarterly cost review meetings.
9. Approved Vendor List:  Included in Exhibit A is a section entitled “Materials (BOM)” for each Product to be manufactured hereunder.  CM shall manufacture the Products using components obtained from vendors included on Customer’s list on the BOM, as it may change from time to time, of vendors who are approved sources of supply for such components.  Any changes to Customer’s approved vendor list shall not require further amendment to this Agreement.
10. Upside\Downside Flexibility and Support:  CM shall make all reasonable efforts to meet Customer’s Upside and Downside requests in accordance with the following schedule where “Days” indicates the number of business days prior to required delivery date of Product. CM shall provide such Upside and Downside flexibility to Customer beginning with the third full month of production of the Product(s).
Days                                                              % Upside                           % Downside
0-15                                                               None                                   None
16-30                                                             25%                                      25%
31-60                                                             50%                                      50%
>60                                                                 100%                                   100%
11. Schedule Changes:  Customer may reschedule the delivery dates of Product(s) set forth in a Forecast or Release by sending CM a written change order.  The volume of Products for which delivery may be rescheduled shall be determined in accordance with the following schedule where “Days” indicates the number of business days prior to required delivery date of Product.
Days                          Volume % Reschedulable
0-15                           None
16-30                         25%
31-60                         50%
>60                            100%

Impact of Rescheduling:  Should Customer exceed the rescheduling limits set forth above, Customer shall be liable to CM for all materials and components purchased by CM pursuant to a Release or Forecast, plus any MOQ, LLTC or NCNR components.  Should one or more shipments be rescheduled for more than fifteen (15) days, an inventory carrying charge of the lesser of: (i) 1.5% per month, or (ii) the maximum rate permitted by law, will accrue.  In no event shall shipments be rescheduled for more than thirty (30) days from the original delivery date.  Rescheduled Releases may not be canceled, in whole or in part.
12. Engineering Design Changes:  The parties shall abide by the policies set forth in Exhibit C hereto with respect to engineering change orders.  CM will charge Customer, and Customer shall pay CM, $250 per engineering change order to cover administrative costs incurred in processing and implementing.
13. Product(s) Testing and Debug:  Included as part of its standard assembly services, CM will provide In Circuit Test (ICT) and Functional Circuit Test (FCT) testing.  The test times and costs are based on the scope of work and complexity of the Product(s).  CM establishes an upper limit for ICT and FCT testing on the test and debug time of individual board level Product(s) at four (4) hours.  CM will provide Customer with a list of defects found promptly after the discovery thereof.  The disposition of Product(s) will be determined mutually by CM and Customer.  Any additional debug and rework performed by CM will be done on a time and materials basis, provided that any defects which qualify for warranty service pursuant to Section 20 (“Warranty”) will be remedied free of charge.  The ICT and FCT testing, and any additional debug and rework, will be performed by CM employees.
14. Cancellations:  In the event that the Customer wishes to cancel Product(s) ordered pursuant to this Agreement, Customer shall be liable to CM for the following:
14.1.Payment for all Product(s) delivered to Customer and in transit, plus Product(s) in CM’s finished goods inventory prior to, and including, the effective date of cancellation, at the unit prices applicable to such Product(s) as set forth in applicable Releases.
14.2.Payment for all “work-in-process” as of the effective date of cancellation based upon the percentage of completion, as reasonably determined by CM, multiplied by the applicable unit price of the Product(s).  Customer may request CM to complete and deliver all work-in-process inventory at the unit prices set forth in applicable Releases.
14.3.Payment for the cost plus profit associated with CM material inventory and materials on order which cannot be canceled or returned, provided that such inventory is in support of Customer’s Releases or Forecasts, but including MOQ.
14.4.Payment of any restocking charges, “bill-backs”, cancellation charges and other charges incurred by CM with suppliers for all EOQ ordered for the manufacture of Product(s) in accordance with Customer’s Releases or Forecasts.
14.5.CM shall use its reasonable efforts to minimize cancellation charges by returning inventory and material for credit, canceling material on order and applying material to other CM business requirements (when possible, at the sole discretion of CM) and minimizing all work-in-process and finished goods to support the final production schedule.  Upon payment of the cancellation charges relating thereto, all finished goods inventory of Product(s), work-in-process, and NCNR components at CM or on order shall be delivered, at Customer’s expense, to Customer, F.O.B. CM.
15. Product End-of-Life:
15.1.End-of-Life By Customer:  Customer shall use commercially reasonable efforts to notify CM in writing at least three (3) months prior to Customer ceasing to purchase Product(s), which notice shall include Customer’s requirements for such Product(s) during such three (3) month, or longer, period.
15.2.Upon receipt of such notice, CM shall:
15.2.1.    Make all reasonable efforts to promptly reduce or cancel its outstanding purchase orders for components and raw materials in excess of the Customer’s end-of-life requirements.           Provide Customer with an inventory exposure report, upon request, for excess finished goods, work-in-process and material inventory on hand at CM.  Customer shall be liable to pay, reimburse, or otherwise compensate CM for such inventory in accordance with the liability standards for cancellation set forth in Section 14 (“Cancellation”) hereof; and           Provide Customer with documentation reasonably satisfactory to Customer, within a mutually agreed upon time frame after receipt of notice therefore, indicating the quantities and type of inventory.           End of Life By CM:  CM shall give Customer three (3) months written notice of its intention to cease manufacturing Product(s), upon the receipt of which Customer shall have the right to place final purchase orders for Product(s) deliverable during the ensuing three (3) month period.
16. Payment Terms:  Customer shall pay all CM invoices within thirty (30) days of the date thereof. Invoices not in bona fide dispute that remain unpaid within thirty (30) days of the date thereof will be subject to an interest charge equal to the lesser of 1.5% per month or the highest rate allowed by law.  Payment shall be made when electronic fund transfer (EFT) is initiated.
17. F.O.B. Point:  All Product(s) shall be shipped to Customer F.O.B. CM’ dock.
18. Ownership of Set-Up Property:
18.1.Ownership of Set-Up Property:  Customer shall own title to all the property listed and described on Exhibit D (the “Set Up Property”).  CM shall hold all Set Up Property and other property provided to CM by Customer from time to time hereafter for Customer, exercise reasonable care in the use and custody of such Set Up Property, and use such Set Up Property only in performing its obligations for Customer under this Agreement.  It is understood and agreed that Set Up Property may be removed by Customer at any time and shall not otherwise be disposed of by CM without specific permission in writing.
18.2.Tool Maintenance:  CM agrees to maintain such Set Up Property in good, satisfactory working condition and to keep it fully covered under CM’s property insurance at all times, all without expense to Customer.
18.3.Calibration Consigned Equipment:  CM shall undertake the calibration of Customer consigned equipment at intervals specified by written Customer procedures or in accordance with CM’ Quality Policy, whichever is applicable.  The cost for said calibration should be borne by CM for in-house calibration.  For out of house calibration, CM shall advise Customer of the cost of calibration and Customer shall reimburse CM.  CM shall maintain written records of said calibration in accordance with any applicable ISO9001 and FDA guideline.
18.4.Calibration of CM Equipment:  CM shall undertake periodic maintenance and calibration of tools, gages, test equipment, and process control equipment in accordance with CM Quality Policy at CM expense.  CM shall retain written records of said calibration.
18.5.Damaged Equipment and Tooling:  In the event that Set Up Property is damaged beyond what is considered normal wear and tear, it shall be the responsibility of CM or its suppliers to notify Customer within two (2) working days.  It shall be the sole responsibility of CM or its suppliers to bear the full repair cost of damaged tooling or equipment.  Repairs shall be made to the satisfaction of Customer.
19. Acceptance and Inspection:
19.1.Acceptance Criteria.  The basic acceptance criterion shall be conformance to the drawings, specifications, and test circuits specified in the Customer Manufacturing Specification documents included herein as Exhibit A and Customer’s satisfaction of good workmanship and quality as warranted herein.
19.2.Acceptance.  As set forth in Exhibit A, all finished Product(s) undergo a 100% final test designed to ensure that no defective Product(s) are shipped.  However, Customer may inspect all Products promptly upon receipt thereof at the receiving destination and may reject any goods which fail to meet the acceptance criteria as set forth under Section 19 (“Acceptance Criteria”).  Products not rejected by written notification to CM within ten (10) days of receipt at Customer’s facilities or Customer’s assigned distributor shall be deemed to have been accepted.
19.3.Source Inspection.  Customer may, at its option, elect to inspect and accept Products at CM locations.  CM will provide sufficient space for such inspection activities.  Should Customer elect to inspect CM’s location, CM will not be obligated to hold completed Products for Customer’s inspection beyond seven (7) days from the scheduled delivery date.
19.4.Third Party Inspection.  From time to time it is required that a third party such as a UL (Under Writers Laboratories) or CE Mark representative inspect CM locations and the manufacture of Customer’s Products.  CM will provide at all times during normal business hours reasonable access to and sufficient space for such inspection activities and shall assign a CM representative to facilitate such inspections to the satisfaction of the third party.
19.5.Defective Units.  Defective Product detected by inspection will promptly be returned to CM, at CM’s expense, and will be repaired, credited or replaced by CM within thirty (30) days of CM receipt thereof.
19.6.Returned Goods Freight.  The cost of validly returned goods freight for the original shipment from CM to Customer or its agent shall be borne by CM.  The cost of validly returned freight to CM shall be borne by CM.
19.7.Field Return.  All returned Product shall undergo a “Device Failure Recording” procedure by Customer or its agent.  The results of the Device Failure Record shall be shared with CM.  All Products returned during the warranty period (as defined in Section 20 (“Warranty”)) which have defects in material or workmanship shall be returned to CM within thirty (30) days of receipt by Customer for credit, repair or replacement.
19.8.Right to Halt Production.  If testing or yield reports or other means indicate a severe production problem that may lead to non-conforming products, then Customer may order production to halt until resolution is approved by Customer or its authorized agent by specific written instructions from Customer.
19.9.Records:  CM will send to Customer on a quarterly basis complete records on CD or by hardcopy pertaining to Customer’s Product(s).  Such records shall include without limitation:  Incoming Quality Control (IQC) records, process records, ICT and FCT records, batch records, calibration, maintenance, servicing records, finished goods testing, shipping records, purchasing records for parts.  During the term of this agreement, upon reasonable prior notice and during normal business hours, Customer shall be entitled to audit and inspect those books and records of CM, which are maintained by CM in direct connection with the manufacture of Product(s).
20. Warranty:  CM warrants for a period of one (1) year from the date of shipment of the Product(s) that: (i) the Product(s) will conform to the Specifications applicable to such Product(s) at the time of its manufacture, which are furnished in writing by Customer and accepted by CM; (ii) such Product(s) will be of commercially acceptable workmanship and free from defects for which CM or its suppliers are responsible provided, however, with respect to materials, CM warrants only that it will transfer to Customer any transferable warranties, which may be less than 1 year; and (iii) CM will comply with all laws and regulations applicable to the manufacture of the Products, including but not limited to, governmental regulations and environmental standards, but excluding intellectual property, product liability, and consumer protection and safety laws with respect to which and to the extent CM does not have an indemnification obligation under Section 21 hereof.
In the event that any Product manufactured is not in conformity with the foregoing warranties, CM shall, at CM’ option, either (i) credit Customer for any such non-conformity the purchase price paid by Customer for such Product(s), or (ii) at CM’ expense, replace, repair or correct such non-conforming Product(s).  This warranty does not cover malfunctions, defects, or failures resulting from misuse, abuse, accident, neglect, improper or inadequate maintenance, or alteration, modification, improper installation or repairs by any party other than CM.  Any out of warranty repairs performed by CM shall be invoiced to Customer on a time and materials basis. THE FOREGOING REMEDIES FOR BREACH OF WARRANTY CLAIMS SHALL BE IN ADDITION TO ANY OTHER REMEDIES OF CUSTOMER AT LAW AND EQUITY.  EXCEPT AS PROVIDED IN THIS SECTION, CM MAKES NO WARRANTIES WITH RESPECT TO THE PRODUCT(S) OR ITS SERVICES HEREUNDER, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES RESPECTING NONINFRINGEMENT, OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY IMPLIED WARRANTIES ARISING FROM A COURSE OF PERFORMANCE, A COURSE OF DEALING, OR TRADE USAGE. CM MAKES NO WARRANTY WITH RESPECT TO SOFTWARE.  ALL SOFTWARE IS PROVIDED “AS IS”.
21. Indemnification:
21.1.Customer agrees to defend, indemnify and hold CM harmless from any third party claims, judgments, liabilities, expenses, or costs (including reasonable attorneys’ fees) arising out of or relating to any claim that the manufacture, use, or sale by CM of the Products hereunder infringe any copyright, patent, trademark, service mark, or other proprietary right of any third party or misappropriates a trade secret of any third party, except to the extent that such claims result from manufacturing processes developed by CM and used in the manufacture of Product for Customer.  In addition, Customer shall indemnify and hold CM harmless from any third party product liability claim brought against CM arising out of a defect in the design of the Product, components defects un-attributable to CM, or the conformance by CM with specifications or instructions provided by Customer.
21.2.CM agrees to defend, indemnify and hold Customer harmless against from any claims,  judgments, liabilities, expenses, or costs (including reasonable attorneys’ fees) arising out of or relating to (i) any claim that CM’ manufacturing processes infringe any copyright, patent, trademark, service mark, or other proprietary right of any third party or misappropriates a trade secret of any third party, except to the extent that such claims result from the Licensed Know-How supplied by Customer to CM, or (ii) a defect in the manufacture of the Product attributable to CM’s manufacturing process; provided, however, that  CM’s liability hereunder shall in no event exceed $5,000,000 in the aggregate.
21.3.This Section 21 memorializes Customer’s and CM’s sole responsibilities to each other with respect to intellectual property infringement and product liability claims.  An indemnified party pursuant to this Section 21 shall (i) notify the indemnifying party promptly in writing upon receiving or learning of any claim or action pursuant to which indemnity will be sought; (ii) give the indemnifying party sole control of the defense and all related settlement negotiations; (iii) provide reasonable assistance to the indemnifying party in the defense of any such action; and (iv) not settle or compromise any claim without the prior written consent of the indemnifying party, which consent will not be unreasonably withheld.  This Section shall survive the termination of this Agreement.
22. Confidentiality; Proprietary Rights:
22.1.Obligations of Confidentiality:  Each party (the “Receiving Party”, as applicable) agrees during the term of this Agreement and thereafter to take all steps reasonably necessary to hold the Confidential Information of the other party (the “Disclosing Party”, as applicable) in trust and confidence.  The Receiving Party shall use the Disclosing Party’s Confidential Information only for the purposes of providing and receiving Products and services to and from the Disclosing Party as set forth herein, unless otherwise mutually agreed in writing.  The Receiving Party may disclose the Disclosing Party’s Confidential Information to its employees solely for the purposes of performing this Agreement or as otherwise allowed herein, including consultation regarding the purchase or provision of Products and services, but only if such employee has signed a confidentiality agreement containing provisions similar to the obligations set forth in this Section 22.
22.2.License Grant:  Subject to the terms and conditions of this Agreement, Customer hereby grants CM a non-exclusive, non-transferable, fully-paid, royalty-free license to (a) use the Set Up Property solely in connection with manufacturing the Products for Customer, and (b) use and reproduce any of the Licensed Know-How provided to CM under this Agreement solely for the purpose of manufacturing the Products for Customer.  Licensed Know-How which is also Confidential Information shall be held in confidence by CM in accordance with Section 22.1 (“Obligations of Confidentiality”) above and may be provided or disclosed to third parties only in accordance with the requirements of such section.
22.3.CM Ownership:  All Intellectual Property Rights in CM’ manufacturing processes used or developed by CM in connection with the manufacture of the Products for Customer shall be owned exclusively by CM.  The manufacture of the Products for Customer hereunder does not convey to Customer any rights or license, express or implied, or by estoppel or otherwise, under any such CM Intellectual Property Rights.  No license, express or implied, with regard to any trademark of CM or its affiliated companies is granted to Customer under this Agreement.  CM expressly reserves all right, title and interest, including all Intellectual Property Rights, in and to such manufacturing processes.
22.4.Customer Ownership:  All Intellectual Property Rights in the Set-Up Property, Licensed Know-How and the Products shall be owned exclusively by Customer (or its licensors).  Except as expressly set forth in Section 22.2 (“License Grant”), the manufacture of the Products by CM does not convey to CM or its affiliates any rights or license, express or implied, or by estoppel or otherwise, under any such Customer Intellectual Property Rights.  No license, express or implied, with regard to any trademark of Customer is granted to CM or its affiliates under this Agreement.  Customer expressly reserves all right, title and interest, including all Intellectual Property Rights, in and to such Licensed Know-How, Set Up Property and Products.
23. Assignment:  Neither party may assign this Agreement, or any portion thereof, without the prior written consent of the other party; provided, however, Customer and CM may, with reasonable notice and without forfeiting its rights hereunder, assign, in whole or in part its rights under this Agreement to its direct or indirect subsidiaries.
24. Entire Agreement:  This Agreement (including the accompanying exhibits) is the entire understanding between CM and Customer with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, dealings and negotiations.  No modification, alteration or amendment shall be effective unless made in writing and signed by duly authorized representatives of both parties.  All purchases by Customer during the term of this Agreement shall be governed only by the terms and conditions of this Agreement, notwithstanding any preprinted terms and conditions on any CM or Customer forms or documents.
26. Term and Termination:  This Agreement shall remain in effect for a period of one (1) year from the Effective Date.  Thereafter, this Agreement shall automatically renew for successive one year periods.  Either party may terminate this Agreement at any time and for any reason upon ninety (90) days prior written notice to the other party; provided, however Customer shall have the right to have CM manufacture Products prior to the effective date of such termination.  Notwithstanding the foregoing, either party may terminate this Agreement in the event that the other party (i) fails to cure a material default under this Agreement within thirty (30) days after receiving written notice thereof or (ii) becomes insolvent, files or has filed against it a petition in bankruptcy, or generally becomes unable to pay its debts as they become due.
27. Return of Confidential Information; Survival:  Following termination of this Agreement, each party shall promptly return to the other party all Confidential Information of such other party and certify in writing that it has done the same.  The provisions of Sections 20 (“Warranty”), 21 (“Indemnification”), 22 (“Confidentiality”), 24 (“Entire Agreement”), 25 (“Limitation of Liability”), and Sections 27-33 shall survive termination of this Agreement.
28. Insurance:  During the term of this Agreement and for a period of three (3) years thereafter, CM shall maintain insurance in minimum amounts as set forth in Exhibit F. Customer, its directors, officers, employees, agents, parent, subsidiaries and affiliates shall be named as additional insured under each such policy of insurance.  All of the foregoing policies shall be issued by insurance companies having at least an “A” rating by A.M. Best Company. These insurance provisions set forth the minimum amounts and scopes of coverage to be maintained by CM and are not to be construed in any way as a limitation on CM’ liability under this Agreement. The insurance coverages shall be primary unless other valid and collectible insurance which applies to a loss is also primary.  Upon request, CM shall furnish Certificates of Insurance, evidencing all of the foregoing insurance coverages. All of the above-described policies shall provide that the insurer will endeavor to provide Customer with no less than thirty (30) days’ prior written notice of cancellation, or non-renewal. Certificates of Insurance evidencing any renewal or replacement of any of these insurance coverages shall be furnished to Customer within ten (10) days after such modification, renewal or replacement.
29. Force Majeure:  Except with respect to Customer’s payment obligations hereunder, neither party shall be liable for their failure to perform under this Agreement due to reasons beyond their reasonable control, including, without limitation, fire, flood, acts of God, accident, riot, war, government intervention, natural disasters, part shortages, equipment failures or power outages.
30. Relationship of the Parties:  Neither party is designated or appointed an agent or representative to the other party and no party will have any authority, either expressed or implied, to create or assume any agency or obligation on behalf of or in the name of the other party.  The relationship of CM to Customer is that of independent contractor, and neither party will have any responsibility for or obligations to the employees of the other.
31. Successors; Severability:  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns.  If any provision of this Agreement is adjudged to be unenforceable in whole or in part, such adjudication shall not affect the validity of the remainder of this Agreement.  Each provision of this Agreement is severable from every other provision and constitutes a separate, distinct and binding covenant.
32. Non-Waiver:  Failure by either party to exercise any right granted in this Agreement shall not be deemed a waiver of such right.
33. Governing Law:  The sale of Product(s) hereunder shall not be governed by, or subject to, the United Nations Convention on Contracts for the International Sale of Goods.  This Agreement shall be governed by the laws of the (LIST APPROPRIATE MUTUALLY AGREED GEOGRAPHIC REGION), without regard to its conflicts of laws provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written.
Customer, Inc.                                            Contract Manufacturer, Inc.
Name:  _________________________     Name: _______________________________
Title:  __________________________      Title:   _______________________________
Date:  _________________________        Date:  _______________________________

I.  Customer Product Listing and Specifications
Part Number                      Description                                                   Specifying Document
List Part Number              List product to be manufactured         List specification document number
List Part Number              List product to be manufactured         List specification document number
Etc.                                         Etc.                                                                   Etc.

II. Manufacturing Specifications
Box Build Assembly specification and part number: ____________. This is provided as guidance only, actual details are contained in the documents listed below. The Box Build is the complete electronics package prior to adding packaging.  At this level the device is fully tested and entered into the Device History Record (DHR) using a test download.
1.0.  Materials (BOM)
For all other parts not listed below refer to Customer's Device Master Record incorporated hereto.
ItemCatalog ID # and RevisionTitleSpecified ByQTY.Approved Vendor List (AVL)
1.01Part numberCase TopList specification number1CM
1.02Part numberMain BoardNumberCM
1.03Part numberBoard 2NumberCM
1.04Part numberCase BottomNumberPlastics Vendor
1.05Part numberLCDNumberLCD Vendor
1.06Part numberLCD HolderNumberSheet Metal Vendor
1.07Part numberMicroprocessorNumberMicro vendor
1.08Part numberButton AssemblyNumberRubber Vendor
1.09Part numberEtc.Number

2.0  Incoming Quality Instructions         (List any special quality instructions)
3.0  Assembly Instructions per the Assembly specification (List part number)
4.0  Quality Plan for Product (Developed ahead of time or with Contract manufacturer, reference the plan part number)
5.0  Test Instructions (List part numbers of any special test instructions)

Product Pricing
List at minimum three columns: Part Number, Description of Product, and Price, optionally Target Price.
Part Number                 Description                 Start Price                 Target Price
XX-####-RRR                Product 1                     $ xx.xx                        $XX.00
XX-####-RRR                Product 2                     $ xx.xx                        $XX.00
Etc.                                    Etc.                                 Etc.                               Etc.

Exhibit C
List the Engineering Change Notice policy from the contract manufacturer.  An example is provided below.
CM ECN POLICY addendum to CM Manufacturing Services Agreement
  1. Engineering Change Notices (ECNs) are required for changes to the design of a Product that affects form, fit or function.  Changes to design documentation (piece part drawings, assembly drawings, inspection requirements, BOMs, AVLs, test requirements) shall be handled via this ECN Policy.  ECNs, by their very nature, can provide challenges in capturing the true impact to several key areas of contract manufacturing.  However, because of this impact, we must pay close attention to all costs (material, labor and lost opportunity) and follow a plan to capture, report and seek reimbursement from our customers for these costs.
  2. Therefore, the following guidelines will be utilized when accepting and reviewing ECNs from Customer:
2.1.    All ECN review and evaluation must be complete within 72 hours of receipt maximum.  At CM’ option, a turn time of 48 hours may be required.
2.2.    Input from several sources will be required for proper installation of ECNs.
2.3.    Cost impacts will be communicated and charged to Customer as set forth herein.
2.4.    Schedule impacts will be communicated to Customer and ship dates may be requoted based upon the nature of the ECN.
  1. CM may originate change orders to institute process changes, assigning actions from the first article process, part substitutions, etc.  This type of change is considered local and follows the same basic flow of the Customer-originated ECN.
  2. Negotiating cost and schedule impacts:
4.1.    The Program Manager (PM) applies appropriate pricing factors and communicates the total impact to Customer.  The PM is responsible for receiving Customer authorization and purchase orders to implement the ECN and notifying the project team to proceed when appropriate.  Sales personnel may need to work with the PM during this negotiation process.
4.2.    Customer will be given the following options to choose from regarding the cost impact of the specific ECN, which options may be modified from time to time upon the mutual written agreement of the parties:
4.2.1. The ECN is not cut-in on current work in process (WIP); or
4.2.2. Customer pays for the full value of Product in WIP and finished goods inventory if an ECN forces a hold on the production floor which lasts in excess of five (5) working days; or
4.2.3. A carrying charge of .05% per day shall be charged to Customer for the value of the WIP for each day beyond any five (5) working day hold on the production floor caused by the ECN.  Such charge shall be billed weekly on net 10 day terms.
4.3.    Once Customer has chosen one of the three preceding options, the following additional charges will be paid by Customer.  Such charges shall be billed weekly on net 10 day terms.
4.3.1. All scrap or obsolete raw materials in WIP, finished goods and raw material inventory;
4.3.2. All labor charges associated with any necessary rework;
4.3.3. Administrative fee of $250.00; and
4.3.4. 1% lost opportunity cost on any CM revenue impacted by the ECN
4.4.    CM reserves the right to requote any affected Products in WIP and/or future backlog which may be affected by an increase in material and/or labor costs.  In addition, requoted ship dates will be assigned to the affected Products and communicated by the PM to Customer.
5.1.    Once the ECN has been implemented and all action items closed, the Product Engineer (PE) will close the ECN and notify the PM that the ECN has been completed.  At this time, CM, at its option, may invoice Customer for the cost impact of the ECN as set forth below.
6.1.    Once a copy of the ECN Cost and Schedule Impact worksheet is received by the PM, the PM will apply the appropriate costs of the ECN and invoice Customer accordingly.  To invoice Customer for the appropriate charges of the ECN, the PM will enter a sales order on CM’ order system the ECN charges as agreed upon by Customer.  The copy of the worksheet will be filed in Customer file with other purchase orders.  In those cases when the ECN creates a hold on the floor in excess of the 5 working day period, the PM will contact Customer to verify the appropriate sales order to ship against.
EXHIBIT D – Set Up Property
Provide a complete list of all the test tooling, fixtures, and equipment owned by the Customer that will be consigned and maintained by the CM.  Examples:  modems, multimeters, specialty test simulators, special test fixtures, function generators, bar code printers, power supplies.  Note that final box test software is installed on computers consigned by Customer to CM.
Exhibit D – Sub schedule 1 – Test Fixtures and Equipment

Exhibit D – Sub schedule 2 – Process Tooling and Fixtures
Examples: solder past stencils, LCD fixture, battery contact holder, ultrasonic welder equipment, fixtures, and components, masking fixture, conformal coating fixtures.
6 Etc,

Exhibit D – Sub schedule 3 – Production Equipment
List equipment such as Autosplice machine, Ultrasonic welders, any other consigned equipment, etc.

List the security policy from the Contract Manufacturer, and example is provided below.
SECURITY POLICY:  This exhibit outlines CM’s minimum security requirements and obligations for manufacturing Products.  This is a non-exclusive list.  Additional or different measures than those outlined below may be required for CM to comply with the terms and spirit of the Agreement.
  1. Secured Facility
1.1.    CM shall at all times maintain a secured facility.  A security system and procedure must be in place to insure the security of inventory of Products in CM’s facility from internal and external theft.  All doors, windows, dock areas, sky lights, and any other form of entry from the outside to the inside of the facility must be secured with an appropriate securing mechanism and alarm system.
2. Inventory
2.1.    Products shall be kept in controlled dedicated work areas with no commingling of Customer’s Products with that of other entities.
2.2.    Regular cycle counts, consistent with the sensitivity of the Inventory, shall be made upon request with all results forwarded to Customer.
2.3.    Any incidents of burglary, theft, unaccounted Inventory, shrinkage of Products, or components theft affecting inventory targeting Customer’s Product shall be reported immediately to Customer.  In the event of any of the foregoing, CM shall investigate the reasons therefore, and promptly take the necessary steps to prevent such situation from arising again.
2.4.    CM shall maintain 100% accountability of components and scrap.
2.5.    CM shall keep sensitive materials stored in a secure area with limited employee access.
3. Employee/Temps/Contractors/Visitors
3.1.    CM shall require all employees, temporary employees (directly or through their temporary agencies), independent contractors and subcontractors either to be bound by an employee handbook containing a confidential or non-disclosure requirement and/or sign a separate non-disclosure agreement prior to access to Confidential Information of Customer.
3.2.    CM shall not allow unauthorized employees, temporary employees, contractors or visitors access to the Customer Inventory or controlled access areas.
3.3.    CM shall limit access to Customer Proprietary Information to only those employees and contractors having a need to know the same.
4. Scrap and Sensitive Material
4.1.    All Products (includes any components thereof) shall be disposed of by an authorized Customer vendor.  Accurate records of the disposition of the said material shall be kept by CM (logs of accessibility shall be kept current and made available to Customer on reasonable request).
4.2.    Under no circumstances shall CM allow Product, including Product packages, components, serial numbers, Confidential Information or other Customer property to be disposed of in CM’ dumpster.
5. Loss, Damage, or Theft
5.1.    CM shall immediately report to Customer and the proper legal authorities the loss, damage, or theft of any Products, Set Up Property, Licensed Know-How, Confidential Information, or Products (includes any components thereof) and shall cooperate at all times with any subsequent investigation or documentation of such incident.
Exhibit F
List the insurance policy from the contract manufacturer, an example is provided below.
Insurance Policy
Commercial General Liability$1,000,000  per occurrence
$2,000,000 general aggregateCovering bodily injury, personal injury, property damage, including products/completed operations and contractual liability for such injury or damage assumed by CM under this Agreement
Worker's CompensationStatutoryIn accordance with all federal, state, and local requirements.
Employers Liability$500,000 each accident
$500,000 disease/policy limit
$500,000 disease/each employee
Covering bodily injury by accident or disease (including death)Automobile Liability$1,000,000 combined single limitCovering bodily injury (including death), and property damage for all vehicles that BPA owns, hires or leases
Umbrella Liability$5,000,000
Errors and Omissions Liability$1,000,000 annual aggregate

*************** End Agreement *************
Disclaimer:  Material provided herein is for illustrative and educational purposes only. If you require the use of these or similar documents, you should seek the advice of a legal attorney.