5 Sneaky Ways Manufacturing Contracts Get Abused

There likely aren't any manufacturing contracts that allow for completely effortless management. Even the simplest agreement requires some level of oversight to ensure that the terms of the deal are met and any stipulated exchange of money occurs. Of course, there are plenty of contracts that require diligent supervision, as tardy performance or a breach of contract could have disastrous consequences. Although, in some cases diligence may not be able to counter the actions of the other party.

In manufacturing, for example, multiple companies scattered across the globe may play a role in some phase of the production process. In addition to being more difficult to oversee another company from afar, circumstances may arise elsewhere that affect that company's ability to perform. Unfortunately, it may not be possible to ascertain the veracity or scope of any alleged issue, and some companies may use such excuses intentionally to buy themselves time. These are no doubt sneaky ways that parties are able to abuse manufacturing contracts, often with impunity. Here are five of the most common ways that happens:

1. Subcontracting

Subcontracting is obviously a normal part of contracting these days, but its prevalence certainly doesn't negate its issues. During some contract negotiations, it may be clear that one of the parties intends to use a subcontractor. However, in many instances, one of the parties does not realize until later that it needs to hire subcontractors to help perform some aspect of the project. Thus, the other party to the contract may not even realize that there is a subcontractor participating.

For the most part, this probably isn't an issue. But, in some industries, there are strict rules and regulations or a product may need to meet extremely detailed specifications, and thus adding a subcontractor to the mix may cause problems. Unfortunately, a company may not even realize that one of its suppliers is relying on a subcontractor until an issue arises, and at that point, patience may be the only available solution.

2. External Factors

Another issue that stems from manufacturing contracts requiring cooperation from multiple parties is the impact that external events may have on those different parties. For example, each contracting party will have its own vendors and suppliers to contend with and any issues in those relationships may radiate out to the party's other relationships.

Or, state and local laws may change impacting the way one party operates or requiring hefty investments to attain compliance, which is obviously also going to affect contracting relationships. Unfortunately, in some instances, companies may exaggerate these kinds of issues or use it as an excuse for untimely performance, or even a complete breach.

3. International Constraints

It is hard enough dealing with issues across state lines, and adding an international border is even trickier. In the event there is economic or political discord, production and distribution may be completely disrupted. Granted, there are legitimate instances in which international affairs affect business operations. However, an overseas contracting party with internal problems may seek to capitalize on these events beyond their actual scope.

4. Pricing Surprises

Depending on the complexity of a product, the components that comprise that product may not always be readily available or affordable. Obviously, supply and demand are the primary drivers behind pricing, but some companies have to shift their own costs onto their clients, accomplishing this via unexpected pricing increases. For manufacturers on tight deadlines, they may be put into a situation where they have to continue to pay the higher price until alternative arrangements can be made, or risk costly consequences elsewhere.

5. Quality Erosion

In general, customer service tends to be on point at the beginning of a contracting relationship. The parties usually want to ensure that the relationship is cordial and endures. However, once the honeymoon phase wears off, some companies begin to take the business for granted and may become a bit lazy. When one company is delivering high volumes of a product to a client for years on end, there also may be an assumption that things are just fine, but the combined laziness and assumptions often lead to decreased quality control and even erosion.

Successful contracting really comes down to honesty, fairness, communication, and problem solving. Unfortunately, things happen that easily disrupt this delicate balancing act. As a result, companies with manufacturing contracts must always be on their toes and have a strong contract lifecycle management system in place to ensure that they are ready and able to address even the most subtle of issues. Book our free demo to find out how CLM software can help managing tons of contract in manufacturing.