A manufacturer secures a significant new opportunity with a major customer. The purchase order supports growth, production increases, and new equipment may be required. On paper, the business case looks strong. 

Months later, a quality issue, late component delivery, or customer-driven design change creates warranty claims, production delays, or indemnification demands that were never fully priced into the deal. As manufacturers take on larger customers, OEM work, Tier 2 and Tier 3 supplier opportunities, defence-related contracts, or export sales, the problem is often not the product. It is the contract. 

The reality is that a supply agreement is not simply a document governing a transaction. It is a document that allocates risk, assigns responsibility, and determines which party bears the financial consequences when problems arise. 

Manufacturers that understand this distinction are often better positioned to protect margins, preserve customer relationships, and avoid costly disputes. 

As manufacturers grow, supply contracts can determine whether new work strengthens the business or quietly erodes margin, flexibility, and enterprise value. 

Contract Negotiation Is Ultimately About Risk Allocation 

Many manufacturers approach contract negotiations by focusing primarily on commercial terms such as pricing, volume commitments, delivery schedules, and payment terms. 

While these issues are important, they are only part of the conversation. 

A contract also determines: 

• Who bears the risk of delays? 

• Who bears the risk of defective products? 

• What happens if a supplier fails to perform? 

• Who is responsible for regulatory compliance? 

• What damages can be recovered if something goes wrong? 

• How quickly can the relationship be terminated? 

These provisions can affect profitability as much as price. If liability is too broad, indemnity obligations are too onerous, or warranty commitments are too expansive, a supply agreement can become less profitable than expected. 

This is particularly important when dealing with larger customers, including OEMs and major Tier 1 purchasers, whose contracts may contain broader protections, tighter remedies, and more detailed supplier obligations. 

Not All Customer Contracts Are Negotiable, but Most Are 

Many manufacturers assume that customer-issued purchase orders, supplier agreements, or standard terms and conditions are non-negotiable. 

That assumption can be costly. 

While certain customers have less flexibility than others, particularly large organizations with established procurement procedures, important contractual provisions can often be modified through thoughtful negotiation. 

In my experience, manufacturers frequently focus their negotiating efforts on pricing while accepting legal terms that expose the business to significant risk. Negotiations should focus not only on what the manufacturer will be paid, but also on the obligations being assumed in exchange for that payment. 

A contract that appears commercially attractive can quickly become problematic if the risks assumed are disproportionate to the anticipated return. 

Pricing Mistakes Are Usually Visible. Contract Risk Isn't. 

Manufacturers generally recognize when they have underpriced a contract. Contractual risk is different. A liability exposure may remain invisible until months or years later, when a dispute, warranty claim, or product failure reveals obligations that were never fully appreciated during negotiations. 

Indemnification Provisions Deserve Careful Review 

Indemnification clauses are among the most important risk-allocation provisions in supply chain agreements. They may require one party to compensate another for specified losses, claims, or liabilities. 

Manufacturers should carefully consider: 

• What events trigger the indemnity? 

• Is the indemnity limited to matters within the manufacturer's control? 

• Are there financial caps on liability? 

• Does the obligation extend to third-party claims? 

• Are legal costs included? 

Broad indemnities can create substantial exposure, particularly when products are integrated into larger systems or supply chains. 

Warranty Obligations Should Reflect Commercial Reality 

Customers often seek broad warranty protections. Manufacturers should ensure those obligations align with operational realities and expected product use. 

Questions worth considering include:

• How long does the warranty period last? 

• Are warranty obligations consistent with product performance expectations? 

• What remedies are available? 

• Is repair, replacement, or refund the exclusive remedy? 

• Are consequential damages excluded? 

Warranty provisions should be evaluated alongside quality control processes, insurance coverage, and anticipated financial exposure. 

Limitation of Liability Clauses Can Protect Profitability 

Limitation of liability clauses are critical because they determine how liability is managed if something goes wrong. 

Questions to consider include: 

• Is liability capped? 

• How is the cap calculated? 

• Are certain claims excluded from the limitation? 

• Are consequential, indirect, or special damages excluded? 

• Does the allocation of risk reflect the economics of the transaction? 

The value of a contract should always be considered alongside the potential liability exposure it creates. 

Why Contract Risk Increases During Growth 

Contract risk often increases as a manufacturer grows. New customers, larger purchase commitments, export work, defence-related programs, and more complex supply arrangements often come with more detailed contract terms and less familiar obligations. 

For example, a Tier 2 or Tier 3 supplier that retools part of its operation for a new program may be required to invest in equipment, reserve production capacity, meet enhanced quality requirements, and accept more rigorous delivery or compliance obligations. 

If the contract does not address tooling ownership, recovery of sunk costs, change orders, forecast changes, or termination rights, the commercial value of the opportunity may be reduced by risks that were not visible at the outset. 

For that reason, growth opportunities should be reviewed for more than revenue potential. Leadership should also understand the obligations that come with the work and whether those obligations are proportionate to the margin, investment, and long-term value of the relationship. 

Delivery Commitments Must Be Realistic 

Supply agreements often contain aggressive delivery requirements and performance metrics. While manufacturers understandably want to secure business, commitments should be realistic and achievable. 

Leadership should consider: 

• Are production assumptions realistic? 

• Is adequate flexibility built into delivery schedules? 

• How are supply chain disruptions addressed? 

• What remedies apply if deadlines are missed? 

• Are force majeure provisions adequate? 

Recent supply chain disruptions have demonstrated how quickly unforeseen events can affect production and delivery obligations. Contracts should acknowledge that not all risks can be controlled by either party. 

This is particularly important when a manufacturer reserves capacity for an OEM program, a defence procurement opportunity, or a customer that requires dedicated line time. The agreement should address what happens if forecasts change, approvals are delayed, or the expected volume does not materialize. 

Intellectual Property Provisions Are Frequently Overlooked 

Manufacturers often focus on product specifications and production requirements while paying less attention to intellectual property language. However, IP provisions can have a significant impact on future business opportunities. 

Manufacturers should understand:

• Who owns product improvements? 

• Who owns custom tooling, drawings, and technical data? 

• Are licences being granted? 

• Can the customer use proprietary information beyond the scope of the relationship? 

• Are future commercialization rights affected? 

In my experience, intellectual property issues often receive attention only after value has been created. By that stage, negotiating leverage may be significantly reduced. 

Ownership and usage rights should be addressed at the outset, particularly where custom tooling, drawings, technical data, or customer-funded product development may affect future business opportunities. 

Termination Clauses Matter More Than Most Businesses Realize 

Many manufacturers focus on entering commercial relationships and spend relatively little time considering how those relationships may end. Termination provisions can have significant financial and operational implications. 

Key considerations include: 

• Can the contract be terminated for convenience? 

• How much notice is required? 

• What happens to inventory and work in progress? 

• Are there obligations to assist with transition activities? 

• What rights survive termination? 

Manufacturers making investments in equipment, personnel, or capacity should ensure they understand how quickly a customer may be able to exit the relationship. 

The Strongest Contracts Support Stronger Relationships 

Contract negotiation is often viewed as adversarial. In reality, the best agreements establish clear expectations, reduce uncertainty, and address risk before problems arise. 

The goal is not to eliminate risk entirely. It is to ensure risk is understood, appropriately allocated, and reflected in the commercial terms of the agreement. 

Well-negotiated contracts do not prevent every issue from occurring. They determine how foreseeable issues, including delivery delays, quality concerns, scope changes, pricing pressures, ownership disputes, and termination rights, will be managed. 

Board-Level Questions Leaders Should Ask 

Before entering a significant supply agreement, leadership teams should consider: 

• Do we fully understand the risks we are assuming? 

• Are those risks reflected in our pricing? 

• Is liability appropriately limited? 

• Are warranty obligations commercially reasonable? 

• What intellectual property rights are being granted or retained? 

• Could termination provisions undermine the business case for the relationship? 

• Do we have the operational capacity to meet performance obligations? 

• Have we reviewed the agreement from both a legal and commercial perspective? 

These are not merely legal questions. They are business questions that directly affect profitability, risk exposure, and enterprise value. 

Executive Takeaway 

Successful contract negotiation involves understanding how risk, responsibility, and value are allocated throughout the relationship. 

In my experience, contract negotiations rarely fail because the parties cannot agree on price. More often, problems arise because the parties fail to fully appreciate how risk has been allocated. For manufacturers, the strongest supply agreements do more than secure revenue. They protect margin, preserve flexibility, and ensure that the risks assumed are proportionate to the value being received. 

To discuss your supply chain contracts, procurement agreements, customer terms and conditions, or contract negotiation strategy, contact Andrew Johnson to schedule a review of the legal and commercial risks affecting your business.