7 Critical Questions to Ask Before Signing a Packaging Contract

The contract packaging market was worth an estimated USD 43.9 billion in 2020, and according to MarketsandMarkets, it's on track to reach USD 58.8 billion by 2025. But, with that much money and competition in the industry, it's more important than ever to proceed with caution when entering a co-packing agreement. Poor performance you can walk away from. What you really need to watch for are the unfavorable terms that chain you to a partner who was never the right match.

What's actually in the fine print

While at first glance co-packing contracts have many similarities such as per-unit rates, turnaround time, and minimum order quantities, the devil is in the details. And often, it's specific details that make the difference between a good situation and a bad one. Auto-renewals, changeover fees, minimums, and liabilities can put you out of business if you're not careful. To ensure you're entering into fair agreements, here are seven questions that normally reveal the most problematic contractual clauses.

1. What does the per-unit rate actually include?

This may seem obvious, but it's not. The base rate seldom is all-inclusive. Inquire exactly about setup fees, line changeover charges, pallet wrapping, inbound receiving, storage, and any fines assessed if your volume doesn't reach the monthly minimum. Some co-packers even include materials in the bill and charge you at a rate hiked above what they pay. Most likely, they'll find other things to bill you for you haven't even thought of. A "fully loaded" cost estimate should be furnished before you even evaluate estimates.

2. Who owns quality - and what happens when product fails?

The quality assurance process of a co-packer depends on what is contractually defined. You can request their acceptable defect rate threshold, ask the type of inspection they run at the end of the line, and demand to know what specifically occurs with non-conforming product. Do they rework it, scrap it, ship it and leave you to deal with it? You must also confirm whether you have explicit audit rights, the right to send someone in unannounced or scheduled to review their QC process. If the contract does not include audit rights, then that's something you should request before you sign the contract.

3. What's the actual throughput, not the theoretical one?

The speed of the assembly line described in their brochure and the quantity actually produced during a run (in the field) aren't the same thing. You should demand data on roughly how many units they produce during an average pack similar to yours. Also, pose questions regarding their ability to accommodate overflow business and how they handle breakdowns. A co-packer that doesn't have solid answers to those queries is one you should probably pass on.

While every co-packer will make the same promises in a sales pitch, the most effective way to hold them accountable is to put several contract packaging companies through the same set of questions before you start negotiating. The differences in how they answer will tell you more than the answers themselves.

4. Who buys the materials, and who absorbs price swings?

A lot of hidden costs tend to creep in when you're sourcing materials and services. The co-packer may be using their materials to produce your product, in which case your costs are not transparent. Ask about their policies regarding passing along price increases on their materials and packaging and how much notice they provide. Also get information on the lead time they need to replenish materials once supplies run low.

If you are responsible for providing components and ingredients, ask what happens if you cannot supply your agreed materials. Get details about how they source them for you, what they do if their supplies run low, how they will produce without your materials if stock runs out, and how they will work with new suppliers.

5. What are the contract term traps?

Ensure you read the term and termination section with a fine-tooth comb. Auto-renewal clauses are pretty standard in co-packing agreements and can lock you in for another full contract period if you miss a cancellation window by even a few days. Find out what the notice period is, 60 or 90 days is fairly typical, but we've seen contracts that require 120 or more.

Also, regarding termination, we suggest you don't leave any details to be worked out after the fact. For instance, we've seen more than one contract where the two parties completely forget to discuss what happens to the packaging inventory, tooling, and dies when the co-packer truck rolls off for a final time. Instead, they end up considering those items to be the co-packer's property until the final invoice is paid.

6. What certifications cover food safety and compliance?

It's important to understand that for food, beverage, or supplement products, the co-packer's compliance posture isn't optional. They either hold current GMP, SQF, or BRC certifications or they needn't bother quoting you a price. Ask specifically, "How do you handle allergen controls? What are your sanitation protocols? How do you verify labels?" Get a detailed answer, and if you don't understand any part of it, have your food safety consultant or auditor call them back. Then ask about a recall event: "How do you notify me? Who covers retrieval and destruction? Does your contract indemnify you from liability you arguably caused?" Finally, get their insurance certificate before you sign anything.

7. Is there a pilot run before full commitment?

A reputable co-packer will not hesitate to do a test batch or onboarding run to ensure that you're a good fit for each other before entering a long-term relationship. This is not only for your benefit - it's your chance to confirm that the speeds, quality, and interpersonal dynamics you experienced during sales aren't complete fabrications. If a co-packer resists or overprices a trial run, that's probably a red flag.

Before you sign

A co-packing agreement isn't just an operational decision - it's a financial and legal one. The questions above won't guarantee a perfect partnership, but they will surface the terms most likely to cost you later. Get specific answers in writing, compare them across multiple vendors, and don't let timeline pressure rush you past the fine print.

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