1.5 Contract Review & Commercial Controls

A signed contract is not a victory; it is a liability container. If the legal terms contradict the operational reality, the factory bleeds cash. We review contracts to define the precise moment risk transfers from us to the customer. Do not rely on "standard terms" unless you have verified they apply to this specific build.

NDA Parameters (The IP Firewall)

The Non-Disclosure Agreement (NDA) is a gateway to technical discovery, not a liability trap. It must facilitate the exchange of engineering data without anchoring the factory to infinite or unquantifiable risk. We do not sign "blank check" legal documents.

If the NDA does not meet the following criteria → Then Redline immediately.

A. Mutuality

• Requirement: Mutual (Bidirectional).
• Logic: Manufacturing is not passive. We share proprietary Process IP (DFM, Test Scripts, Stack-ups) just as the customer shares Product IP. Unilateral (One-Way) agreements ignore our contribution and exposure.

B. Liability & Penalties

• Requirement: Actual Damages Only.
• Restriction: No Liquidated Damages (Fixed Penalties).
• Logic: Reject clauses stipulating a fixed cash fine per breach (e.g., "$50,000 per occurrence"). This incentivizes litigation over minor infractions. Damages must be proven based on actual financial loss.

C. Term (Duration)

• Standard: 2 – 3 Years.
  • Why: The technology obsolescence cycle in electronics is ≈ 18 months. Protecting a schematic for 10 years is legal clutter.
• Exception: Max 5 Years.
  • Condition: Allowed only for High-Reliability sectors (MedTech, Automotive) where product lifecycles exceed standard consumer horizons. Requires VP approval.
• Perpetuity: Forbidden. Confidentiality obligations must expire.

Pro-Tip: Be wary of "Residuals" clauses. These often allow the counter-party to use any information "retained in unaided memory" for any purpose. This is a backdoor for IP theft. Strike it out.

Commercial Control Logic

Analyze these seven pillars. If a clause is ambiguous, redline it immediately.

1. Incoterms (Transfer of Risk)

Shipping terms define who pays for logistics and, more importantly, who insures the goods during transit.

• Standard: Ex-Works (EXW).
  • Logic: Risk transfers to the customer the moment goods leave our dock. Preferred.
• Deviation: Delivered Duty Paid (DDP).
  • Risk: We own customs clearance, tariffs, and last-mile delivery.
  • Action: If DDP is forced -> Add 5% – 10% logistics buffer to the unit price.

2. Liability & Warranty Caps

We manufacture to print; we do not design the product. We cannot be liable for the end-device's performance.

• Cap Logic:
  • If contract requests "Unlimited Liability" -> Reject.
  • Standard: Liability is capped at the value of the specific Purchase Order (PO) or the reworked boards.
• Warranty Period:
  • Standard: 12 months from Date of Manufacture.
  • Exclusion: Warranty void if rework is attempted by the customer.

Pro-Tip: If a customer pushes for a 2-year warranty, calculate the "Bathtub Curve" risk. Most electronics fail early (Infant Mortality) or late (Wear-out). Extending from 12 to 24 months is often low risk if the burn-in process is robust.

3. Intellectual Property (IP)

Distinguish between "Product IP" and "Process IP."

• Product IP: The customer owns the schematics, firmware, and form factor.
• Process IP: We own the DFM report, the reflow profiles, and the manufacturing checklists.
• Rule: Never sign a contract that grants the customer ownership of our internal process methodologies.

4. Forecast & Inventory Liability

Customers want flexibility; factories need stability. The contract must bridge this gap.

• Non-Binding Forecast:
  • If forecast is "for reference only" -> We do not purchase material against it.
• Binding Horizon:
  • Standard: Weeks 1–12 are firm (Work in Progress). Weeks 13–24 are for material authorization.
  • Clause: "Customer is liable for all material purchased to support the binding forecast if orders are cancelled."

5. Change Control (ECOs)

Engineering Change Orders (ECOs) disrupt flow.

• Cost Impact:
  • If ECO is issued -> Production stops.
  • Action: Quote the ECO cost (Scrap + New Tooling + Admin Fee) before implementation.
• Schedule Relief: The contract must state that ECOs automatically reset the Lead Time clock.

6. RMA & Rejection Criteria

Define "Fail" objectively to prevent subjective returns.

• Criteria: Returns are valid only if they fail the agreed "Test Specification" (Chapter 1.2).
• NFF (No Fault Found):
  • If return rate > X% NFF -> Customer pays a screening fee for wasted technician time.

Contract Review Checklist

Use this checklist for every Master Services Agreement (MSA) or new PO with attached terms.

Clause Category	Validation Standard	Status (Pass/Redline)
Incoterms	Explicitly defined (e.g., EXW [City]).	[ ]
Liability Cap	Capped at PO Value or 1x Revenue.	[ ]
Consequential Damages	Explicitly waived (Lost profits, recalls).	[ ]
Payment Terms	Matches approved Finance terms (e.g., Net 30).	[ ]
Material Liability	Customer owns "Long Lead" and "NCNR" stock.	[ ]
Warranty Window	Defines start date (Ship Date vs. Install Date).	[ ]
Gov. Law	Jurisdiction is our local manufacturing region.	[ ]

Approved Deviations Register

When we accept risk, we document it. This register tracks deviations from our Standard Terms & Conditions.

Register Format:

Customer	Clause	Standard Term	Accepted Deviation	Risk Owner
Acme Corp	Payment	Net 30	Net 60	CFO
Beta Inc	Liability	100% of PO	200% of PO (Cap: $50k)	CEO
Gamma Ltd	Warranty	12 Months	18 Months (+2% Price Adder)	VP Sales

Final Checklist

Check Item	Validation Criteria	Criticality
Incoterms	Explicitly defined (EXW preferred). No undefined logistics risk.	BLOCKER
Liability Cap	Total liability limited to PO value or fixed amount.	BLOCKER
IP Ownership	Process IP (Methods) retained by Factory; Product IP to Customer.	High
NCNR Policy	Customer liability for custom/long-lead material is absolute.	High
Warranty Start	Clock starts at Ex-Factory Date (not Installation Date).	Medium
ECO Costs	Clause exists to bill for scrap/retooling upon design change.	High
Deviations	All non-standard terms logged in Deviations Register.	Medium