What Goes Into a Sales Contract With Your Factory?

Before you send any money to a factory, you should always have a sales contract.

A knowledgeable import agent will arrange a contract with your supplier which includes more than the stock standard terms.

Here are five important considerations:

  1. Phone calls and verbal commitments from your factory rep are absolutely NOT enough. You need to get a written, stamped document from a factory manager/owner that says exactly what you both agree to.
  2. Getting a sales person to sign off on a contract is NOT ENOUGH. You need to get this contract stamped by someone in an authority position – an owner or manager. Not the English speaking sales staff. It’s very common for Chinese factories to use the excuse “that sales person left the company, so your contract is invalid”.
  3. All payments to the factory must be tied into passing the quality control (QC) standards you have set. These QC standards must be detailed in the contract and have been signed, stamped and agreed upon by a decision maker. It doesn’t count, unless the right person signs off on the contract.
  4. Never change your contract once it has been made. This says to the supplier – I’m willing to accept lower quality. It’s a slippery slope to follow.
  5. A well written contract is an absolute necessity. It offers you a strong bargaining position and holds the factory accountable to the standards you have set.

What should go into a contract?

  1. Your detailed product specifications: the dimensions, materials, colours, style, sizes, accessories, packaging, logo’s etc.
  2. Payment terms with your China supplier. Generally you’ll want to negotiate the lowest upfront payment possible. Usually 30% upfront and 70% after your quality control inspection has approved production.
  3. If you have approved a sample, this should also go into the contract. You will send your quality control inspector the approved sample and state this is the level of workmanship expected for your production run.
  4. A clause on defective merchandise. How will defective merchandise be replaced? How are you defining defective merchandise? Are you using the standard quality definitions which allow for 0% critical defects, 2.5% major defects and 4.0% minor defects? Allowing for 0% defects is simply not practical – unless you’re in an industry such as the airline industry where every single product needs to be 100% perfect. But how much defective product can you tolerate? How many minor defects can you tolerate?
  5. Have you stipulated that production must take place on the factory premises? Do you know if there will be any subcontracting off premises?  It’s very common for factories to outsource production for a variety of reasons.
  6. What is the production lead time? What date should the goods be ready for shipment? Have you specified an exact date the goods should be ready for shipment? What are the penalties for manufacturers missing your time deadlines? Easy Imex often has a 1% penalty per day, after a certain grace period.
  7. If your quality control inspection is not within acceptable limits – will the factory pay for another inspection?
  8. Warranties. Are there warranties on the product? From what date will these hold? If spare parts are needed how will they be transported to you? And In what time? And at whose cost?

To summarise, having a clear sales contract with clearly defined specifications and conditions is very important. And equally important is ensuring the factory fully understands your specifications and conditions.

And make sure you consider other important terms such as:

  • Will production take place on their registered premise?
  • Who will pay for the quality control inspection if it’s beyond acceptable limits?
  • What defect rate is tolerable?
  • Will there be penalties for delayed shipping?
  • What are the warranty terms?

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    About the Author: Adam

    Adam Gilbourne is the Founder and Managing Director of Easy Imex. Since 2005, he has helped hundreds of companies worldwide to successfully import from China. He has a large expertise on product sourcing, quality assurance, and supply chain management.

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