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A Better Partnership

Ahead of the Curve Auto Supplier Blog

December 09, 2021

Contracting For New Product Development

Customers (typically, the OEM) along with external standard organizations often set specifications and standards for new products. And because the product is new, it is not unusual for parties to experience hiccups in the product design and test phases. Whether the hiccup remains just a hiccup — or completely derails the project — is determined in part by how carefully the parties have planned for this situation under their supply agreements and related contracts.
 
Specific contract terms about what standards apply and how compliance with those standards will be evaluated is imperative not only for the supplier, but also for the customer. Such contract terms can help the supplier plan and budget appropriately for testing costs. These terms do more than just assist with planning, but also protect the supplier if the customer unilaterally adds new standards, or revises existing standards, late in the product development phase. For both parties, the more specific the contract is as to the applicable standard(s), the better. Specificity helps prevent and expedite resolution of disputes about who bears the risk of engineering problems and delays as product development moves forward.
 
At the beginning of the project, the parties should reach an understanding on each of the following:
 

  • What standards apply to the product? Who will test the product to verify compliance to standards? Who will pay for it?

  • Does the product need to meet specific quality standards or metrics from a third-party organization? If so, what organization? Who will test the product to verify compliance with external standards and who will pay for it?

  • If the product is a component that goes into a larger assembly, what tests need to be applied to the component and what tests need to be applied to the entire assembly? Who will perform each kind of testing and who will pay for it?

  • What is the schedule for testing? How will the parties deal with any delays in the testing and development schedule that could impact start of production?

 
First, reach an agreement on these items and then DOCUMENT IT! Leave a paper trail. Use of a RASIC chart can be helpful to outline the parties’ responsibilities. Oftentimes, the parties are eager to launch the project, but agreements about specifications, testing and standards are neither finalized nor well documented until late in the project. It will benefit you to be persistent about documentation, even if it does not seem necessary in the moment.
 
Finally, as product development progresses, circumstances will inevitably change. Do not rely alone on handshakes and mutual understandings to manage the schedule. Instead, document all scheduling changes. It is not always necessary to formally amend your contract(s) to include these changes, but scheduling updates should be memorialized in writing. Such documentation is particularly important when dealing with OEMs or any larger customer, which may have different departments — for instance, sales and engineering departments — that may not communicate particularly well with one another.
 
By following these practices, you will increase the chances of your new product making it to market without costly and bothersome litigation. If you have questions about how to properly plan for potential hiccups in product development, please contact Emily Rucker or your Warner Automotive Industry Group attorney.

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