Use our Toll Manufacturing Agreement to clarify the relationship between your business and a manufacturer.
Updated July 7, 2023
Written by Josh Sainsbury | Reviewed by Brooke Davis
A Toll Manufacturing Agreement is an outsourcing agreement between a company with a product design or product idea and a manufacturing company that will manufacture the product or parts of it.
In addition to the design or idea, the company provides the raw materials or the parts required to create the finished product.
The manufacturer provides the skills, labor, and equipment necessary to make or complete the product.
A toll manufacturing agreement protects the company with the product design from stealing trade secrets or intellectual property. It also prohibits the manufacturer from using the product design to compete against them.
Finally, a toll manufacturing agreement restricts the manufacturer’s employees and contractors to protect trade secrets or intellectual property.
Toll manufacturing agreements benefit companies, as they do not have to create a factory or invest in the equipment necessary to bring the idea or product to life. Using an external manufacturer allows the company to customize the product as appropriate.
The company pays the manufacturer a “toll” for using the manufacturer’s employees, equipment, and facilities.
An effective toll manufacturing agreement should contain detailed specifics so there is no confusion about the expectations of the company seeking manufactured items and the obligations of the manufacturers.
At a minimum, the agreement should include the following:
The time taken to establish expectations and obligations in a written agreement executed with the manufacturer is worth its weight in gold.
As a reference, people often call this document a Toll Processing Agreement.
Any time you trust another person to make, design, manufacture, or compile a product that involves trade secrets or intellectual property.
A toll manufacturing agreement conveys the value you place on the information and your expectations about how others protect the data and provide a remedy if the person or company you rely upon tries to capitalize on your information.
The agreement also details the materials the company will supply and the employee skills, equipment, or factory provided by the manufacturer.
Toll manufacturing agreements protect against the following:
Toll manufacturing agreements protect business owners from losing their competitive advantage due to the secret nature of their idea or product. Once a secret is made public, it can never be returned to its prior status.
Toll manufacturing agreements also protect companies and manufacturers, allowing them to engage in mutually beneficial agreements to create products.
Without a tolling manufacturing agreement, you are at the manufacturer’s mercy. You have no assurances the manufacturer will protect your intellectual property or trade secrets. Even if you trust your manufacturer, a rogue employee may sell the information or use it for their purposes without an agreement.
Alternatively, your design may be improved upon. Without an agreement preserving your right to the intellectual property as improved, the manufacturer or an employee could take the improved design and make a better widget.
Ultimately, this could result in the complete loss of your business.
Without an agreement, there may be confusion about product specifications or product requirements. When creating a product with various components, a single millimeter can be the difference between an appropriately constructed product and a product that can’t be constructed.
Without a detailed list of shipment requirements, the manufacturer may send components using a method that results in missed deadlines.
Product specifications and product requirements are critical to a product’s success. Without a written document detailing the agreement between the company and the manufacturer, the company opens itself up to unnecessary risk.
In any situation where intellectual property or trade secrets are at risk of being stolen, a toll manufacturing agreement is a good idea. It delineates the parties’ expectations and responsibilities, reducing the potential for litigation later.
Toll manufacturing agreements are commonly used when companies seek significant cost savings via outsourcing. Countries such as Brazil, Russia, India, and China offer a lower-cost workforce while still technologically able to meet the demands of highly technical manufacturing needs.
Even within the United States, protecting intellectual property is paramount.
Some companies seek to thwart those who might attempt to misappropriate intellectual property by using different manufacturers to create other parts. For example, a company may make a machine motor in one plant, the electrical circuit boards in another, and the case in a third.
However, even with layers of protection, the product and the company making the product are better protected by a toll manufacturing agreement – even when the company relies on different manufacturing plants.
Toll manufacturing agreements allow companies to supply raw materials or parts to ready-made facilities. Also, companies have greater flexibility to customize their product. These mutually beneficial agreements save companies time and money.
A toll manufacturing agreement also details product specifications. This allows a company to use many factories to create different parts to maintain quality control. It also ensures the parts will fit together to create the product.
Listing product requirements, including delivery requirements, ensures the timely delivery of parts for construction. It also provides the timely delivery of finished products.
Toll manufacturing agreements protect the owner of the intellectual property or trade secret. A toll manufacturer agreement is a good idea if an owner is even slightly concerned about the potential for theft, misappropriation, or new market competition.
Toll manufacturing agreements must be tailored to the facts of each specific case. However, certain elements should be present in every case. Also included in the list below are some aspects which may be suitable for some, but not all, agreements.
Here’s what a typical toll manufacturing agreement looks like. We also provide free templates you can download in either PDF or Word format and fill out independently.
