Contract Glossary
Toll Manufacturing Agreement
Definition
A contract where one company (the principal) provides raw materials to another company (the toll manufacturer) to produce finished goods. The principal owns the materials throughout the process; the manufacturer provides only the labor, equipment, and expertise. The toll manufacturer never owns the product — they're paid a processing fee (the 'toll') per unit or per batch.
In Practice
A cosmetics brand develops a proprietary skincare formula. Rather than building a factory, they ship the raw ingredients to a contract manufacturer, who mixes, packages, and labels the products. The cosmetics brand owns the formula, the ingredients, and the finished products at every stage. The manufacturer is paid $2.50 per unit as a processing toll. If the manufacturer goes bankrupt, the cosmetics brand can reclaim their materials because they never transferred ownership — unlike a typical supply agreement where the supplier owns the goods until delivery.
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Frequently asked questions about toll manufacturing agreement
Ownership of materials. In toll manufacturing, the principal supplies the raw materials and owns them throughout production. In contract manufacturing, the manufacturer sources their own materials, produces the goods, and sells the finished product to the client. Toll manufacturing gives the principal more control over quality and costs but requires managing the supply chain. Contract manufacturing is simpler operationally but means the manufacturer controls inputs.
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Create your contractThis content is for informational purposes only and does not constitute legal advice. For contracts with significant financial or legal implications, review by a qualified attorney is recommended.