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If you want to protect your purchases and relationship with your supplier, you need a strong and durable sourcing contract. All too often sellers make verbal or email agreements without a formal and binding contract. Without this official sourcing contract, your sellers have no penalties for not delivering on their promises. Contracts protect both seller and supplier.
What do you need to include on your sourcing contract to ensure all facets of the importing relationship are protected?

1. Penalty Clause

Most importantly, you need a penalty clause in all contracts. This outlines the potential penalties if a vendor doesn’t meet the requirements of the contract. These penalties can include fines, fees, retribution, and termination of the contract. You should specify the penalties for breaking the contract with regards to production quality, timeline and delivery, shipment, regulations, taxes, and other parts of your contract, as we outline below.

You should include a penalty clause for every aspect of your contract to ensure processes of accountability. For example, you could include a delivery penalty clause that states the supplier will reimburse the full cost of the deposit for any shipment later than 15 days.

2. Types of Communication

It’s crucial to specify the types of communications between supplier and seller in order to establish relationship guidelines. This should include how and how often both parties will communicate. In a similar vein, you may want to outline how you will overcome culture and language barriers. You may want someone on your team who speaks Mandarin to ensure communications remain strong and nothing is lost in translation.

Relationships are highly important in Chinese operations, so outlining these communications customs can strengthen and enhance cross-cultural relationships. Fostering this kind of relationship can help your supplier be more responsive if you need a favor in a bind. For example, if you need an urgent delivery for Black Friday, a supplier with whom you have a good relationship may do you a favor and give you additional factory space amongst the rush of the season.

How both parties communicate will set the precedent for all other aspects of the contract being upheld.

3. Quality Requirements

The quality of your goods is vital to your success, so you need to consistently maintain a quality standard with your supplier. Your contract should outline the different parts of quality regulations to ensure that every part of the product is made correctly. This includes stating the necessary product certifications and defining what the final product will look like.

You can also outline how often you might receive samples of your goods to ensure quality. You should discuss the quality inspection process as well. This will outline the process and frequency of inspections as well as the penalties for not meeting quality or factory standards.

4. Patent Info

Along with quality requirements, you might also discuss patents and infringement. You should outline those patents that you do and don’t hold in the U.S. and worldwide. This direct definition of patents can help ensure your supplier uses your patents and doesn’t inadvertently infringe on others’ patents during the production process. This can also help with future legal concerns in the case of infringement.

5. Timeline

Define the lead-time from order to production to shipment. This helps prevent late deliveries and miscommunications about timing. This will also help you determine when you need to place an order so you can have the inventory available to your customers.

6. Shipments

Negotiate and outline the details of shipment:
• Who will pay for shipping?
• Who will pay for customs fees and duties?
• Who will draw up the customs/tax documents and compliance certifications?
• Who will be the point person if something goes wrong with customs or shipment? How will they handle it?
This again will help negate any potential miscommunications if your goods get stuck in “international waters.”

7. Pricing

This clause is an opportunity to agree upon a set price list.
• How much will you pay per unit?
• How will these rates increase or decrease depending on certain variables?
• What are the possible discounts?
• How often will prices be reevaluated by both sides?

8. Minimum order quantity

Outline the agreed-upon MOQ and related pricing. Discuss opportunities in which the MOQ might change. For example, if you ordered lower than the MOQ, how much more will you pay per unit? If you order double the minimum quantity, will you receive a discount? Learn more about overcoming a risky MOQ here.

9. Payment Terms

This is where you will agree upon the payment method, like T/T (bank transfer) or L/C (letter of credit). You can also discuss when you will pay different amounts. What percentage will be held in a deposit for production? What percentage will you release after receiving the goods? (Note: Never agree to pay the full price up-front before receiving the goods.)

You should also discuss how long the payment contract will last and the options for renewal. Determine whether or not you are grandfathered into a price or if the payment terms will be reevaluated after each term.

10. Taxation

Include in the contract a brief discussion of how taxation works in both countries. Make an agreement about how the price and shipment will reflect taxation, regulations, and customs in China and the U.S. This helps to protect both sides from any inappropriate conduct with tax evasion, customs concerns, and prohibited regulations.

11. Unexpected Incidents

Include a clause that outlines how you and the supplier will work together if an “unexpected incident” happens on either side. For example, if you have an urgent order that needs to be met in half the agreed-upon timeline. Or if your supplier had damage to their factory and needs a longer timeline to get the goods to you. This is an opportunity to establish a formulized expectation to address the unexpected.

Creating a Contract

The above 11 clauses and discussions help create transparency between supplier and seller. This contract opens lines of communication and helps prohibit violation of the agreement.
But building those open lines of communication is always easier said than done. The negotiations prior to signing this contract can be lengthy and challenging.

In this way, it’s often recommended to work with a middleman like Ask Idea Sourcing to help both sides come up with a win-win situation. Ask Idea Sourcing has experience hosting negotiations in order to provide a situation that both parties will be pleased with.

From there, we will create a contract agreement that guarantees legal, binding, comprehensive protection for sellers and suppliers. Our team is on the ground in both America and China, helping overcome cultural and communication barriers towards a well-facilitated relationship.

Protect your business right now with an inclusive sourcing contract. Your business growth starts by requesting a quote.

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