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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