Defining the Co-Packing Relationship and Scope of Work
A co-packing agreement in the food and beverage industry is not a simple “make-and-ship” arrangement. It is a complex, ongoing commercial relationship that must precisely allocate duties for formulation, ingredient sourcing, manufacturing, packaging, quality assurance, and delivery. An effective agreement begins with a detailed scope of work that identifies the exact finished products, formats, sizes, packaging components, and production steps. It should specify who owns or provides formulas, ingredient specifications, packaging materials, and equipment; what documentation the co-packer must maintain; and how responsibilities shift if any element is changed or updated. Vague statements such as “co-packer will produce beverage to brand’s specs” invite disputes, delays, and cost overruns.
Parties should define clear deliverables, service levels, and performance metrics for production yields, fill weights, labeling accuracy, case counts, and on-time shipment. The agreement should incorporate references to standard operating procedures, finished product specifications, certificates of analysis, and quality manuals that are either attached or expressly incorporated by reference. Assumptions about “industry standards” are insufficient; the contract should state what those standards are for the specific product and facility. Even seemingly minor details, such as carton strength, pallet patterns, and shrink-wrap gauge, materially affect freight damage rates and retailer chargebacks.
A common misconception is that an email exchange or a proposal is adequate to govern the relationship. In practice, the scope of work must be embedded in the contract or its exhibits and must address the full product life cycle, including new product introduction, test runs, commercialization, seasonal runs, and discontinuation. The agreement should state who pays for line trials, mold tooling, and changeover time, and how the parties handle minimum order quantities, scrap factors, and rework. This up-front specificity reduces ambiguity and preserves leverage if problems arise.
Regulatory Compliance and Food Safety Obligations
Food and beverage co-packing is governed by a matrix of federal, state, and local regulations, including the Food Safety Modernization Act (FSMA), Current Good Manufacturing Practice (CGMP), Hazard Analysis and Critical Control Point (HACCP) programs for certain categories, and specific rules for low-acid canned foods, acidified foods, juice, seafood, dairy, meat, and poultry products. The agreement should delineate which party is responsible for regulatory compliance, including registration, preventive controls, hazard analyses, environmental monitoring, allergen control, sanitation, and food defense. Failure to assign and monitor these obligations increases the risk of enforcement actions and civil liability, especially if product leaves the facility noncompliant.
The contract should require the co-packer to maintain and make available food safety plans, validation records, and training logs; to conduct routine internal audits; and to undergo third-party certifications such as GFSI-recognized schemes (e.g., SQF, BRCGS). The brand owner should receive the right to audit, both on a scheduled and for-cause basis, and the ability to review corrective and preventive action (CAPA) reports. Do not assume that a clean facility is a compliant facility; documentation, traceability, and verification are the pillars of a defensible compliance posture.
Another common misunderstanding is that the co-packer alone bears food safety risk. Many statutes impose shared or overlapping responsibility on the brand owner as the “responsible party” in commerce. The agreement should therefore include robust cooperation clauses for inspections and inquiries by authorities, protocols for responding to regulatory findings, and requirements that critical changes (ingredients, suppliers, processes, or equipment) be reviewed and approved under a documented change control process before implementation.
Quality Specifications, Testing, and Audit Rights
Quality failures are among the most frequent sources of dispute in co-packing relationships. The agreement must define product specifications with objective, testable criteria such as Brix, pH, water activity, aw, titratable acidity, viscosity, microbial limits, texture, color, aroma, and organoleptic parameters, as applicable. For shelf-stable products, parties should address thermal process validation, scheduled processes, and container integrity testing; for refrigerated or frozen products, cold-chain maintenance and temperature mapping. Packaging specifications should include material composition, barrier properties, torque, seal strength, and artwork version control.
Sampling plans and acceptance criteria must be explicit. The contract should set forth testing methods (e.g., AOAC methods), who conducts them, the frequency, and the consequences of out-of-spec results. Include retention sample policies, hold-and-release procedures, and a documented process for dispositioning nonconforming product (rework, downgrade, destruction). The brand owner should have audit rights, including the ability to place independent quality personnel on-site during initial production runs and seasonal peaks.
Laypersons often believe that “passing a third-party audit” guarantees ongoing quality. It does not. The agreement should require continuous improvement, corrective action tracking, and transparent reporting of key performance indicators such as defect rates, customer complaints, rework percentage, and yield loss. Consider including financial consequences for repeated failures, such as chargebacks, cost-sharing for rework, or service-level credits tied to out-of-spec product or late shipment.
Intellectual Property, Confidentiality, and Ownership of Improvements
Food and beverage products frequently involve proprietary formulas, processing parameters, and trade secrets. A comprehensive co-packing agreement must include a robust confidentiality and trade secret protection framework covering formulas, SOPs, HACCP plans, supplier lists, and pricing. Define what is confidential, how it must be protected, who may access it, and how long obligations last. Include obligations that survive termination, with specific remedies for breach, including injunctive relief.
Ownership of intellectual property is a pressure point. The brand should retain ownership of its formulas, process specifications, and artwork, while the co-packer retains preexisting know-how and generic manufacturing methods. The agreement must address who owns improvements or modifications, such as yield-enhancing tweaks, new packaging die-lines, or equipment settings tuned to the brand’s product. Absent clarity, disputes arise over whether process optimizations constitute co-packer IP or brand-owned technology.
Misconceptions arise around “work made for hire” concepts. In many jurisdictions, these doctrines do not apply to manufacturing services in the way parties expect. Use explicit assignment language and execution-ready forms for assignments of inventions and confirmations of ownership for artwork and labels. Include restrictions on reverse engineering, non-use beyond the contract’s scope, and a narrowly tailored license to allow the co-packer to manufacture the product solely for the brand.
Packaging, Labeling, and Marketing Claims Compliance
Labeling in the food and beverage industry is a minefield. The co-packing agreement should allocate responsibility for label content, regulatory statements, and marketing claims, including ingredient statements, allergen disclosures, nutrition facts panels, net contents, country of origin, and any special certifications such as organic, non-GMO, kosher, or halal. The brand typically controls and warrants label content, but the co-packer must apply it correctly and verify that the correct labels are used for the correct SKU and lot.
Artwork version control is critical. The agreement should require bar code verification, pre-production label approval workflows, and reconciliation of label inventory by version to prevent mislabeling, a major cause of allergen-related recalls. Consider mandating label scanning technologies, in-line vision systems, and line clearance procedures between changeovers. The parties must clarify who pays for label obsolescence when regulatory changes force updates or when forecasts are missed.
Many brand owners assume the co-packer will flag noncompliant claims or nutrition errors. That is risky. The agreement should require the brand to provide compliant artwork and claims substantiation, while obligating the co-packer to alert the brand to obvious inconsistencies and to follow documented label control procedures. Include indemnification allocations tied to label content versus label application errors, and ensure recall cost allocation aligns with the source of the issue.
Forecasting, Capacity, Lead Times, and Change Control
Production planning drives cost and service. The agreement should establish a rolling forecast process, such as a 12- or 26-week forecast with firm purchase order lock-in periods. Define minimum order quantities, economic order quantities, and firm versus flexible windows. Co-packers need reliable signals to schedule labor, reserve line time, and procure ingredients; brands need sufficient agility to respond to retail promotion calendars and seasonality.
Lead times for ingredients, packaging, and third-party testing can vary widely. The contract should document lead times and change control procedures for formula adjustments, packaging redesigns, new certifications, or supplier substitutions. Unapproved changes in ingredients or processes can trigger label inaccuracies, allergen cross-contact, or stability issues. A formal engineering change request process, with risk assessments and trial runs as needed, dramatically reduces downstream failures.
A frequent misconception is that “rush production” has no downstream impact if the line is available. In reality, expediting often drives scrap, overtime premiums, and quality escapes. Build in expediting protocols and pricing, capacity reservation fees, and contingency plans for surge demand. Include penalties or cost recovery when forecast accuracy falls outside agreed tolerances, balanced against service level commitments by the co-packer.
Pricing Structure, Pass-Through Costs, and Payment Terms
Pricing in co-packing is multifactorial. Beyond a per-case or per-unit fee, the agreement should specify pass-through costs for ingredients, packaging, third-party testing, certifications, warehousing, freight, pallets, and waste disposal. Clarify whether the co-packer earns a markup on procured inputs and whether the brand may supply certain inputs directly. Define how yield loss, scrap, and rework are treated financially, including thresholds that trigger co-packer responsibility.
Include a clear price adjustment mechanism for changes in commodity costs, labor rates, utilities, and regulatory compliance costs. Index-based adjustments, periodic open-book cost reviews, or should-cost models can reduce disputes. The contract should also establish payment terms, early payment discounts, setoff rights, and consequences for late payment. Because cash flow is critical to both parties, detail invoice contents, dispute processes, and required backup documentation (e.g., copies of supplier invoices for pass-throughs).
Laypersons often believe that a single “all-in” price is safer. It can be, but without transparency, it obscures true cost drivers and impedes continuous improvement. Conversely, purely cost-plus arrangements can blunt efficiency. A balanced structure, coupled with audit rights over pass-through costs and clearly defined cost ownership for errors, best protects both parties and supports a stable long-term relationship.
Supply Chain, Ingredient Sourcing, and Substitutions
Ingredient integrity underpins safety, quality, and labeling accuracy. The agreement should assign responsibility for supplier qualification, approved ingredient lists, and maintenance of an approved supplier program. If the co-packer will source inputs, the brand should reserve the right to approve or veto suppliers and to require specific certifications or testing regimes for high-risk ingredients (e.g., spices, botanicals, allergens, or imported items).
Substitutions are a recurring risk. The contract must prohibit unapproved substitutions and require documented approvals for any change in supplier, origin, specification, or processing method. Include requirements for Certificates of Analysis, allergen statements, GMO declarations, and country-of-origin statements. Establish a robust traceability system linking lots of ingredients to finished product lots to enable efficient recall or withdrawal if necessary.
It is a misconception that identical spec sheets guarantee equivalent performance. Differences in particle size, moisture content, or microflora can cause stability or sensory shifts. Require pilot runs or bench trials for new suppliers or ingredients where feasible, and allocate cost and timing for such trials. Consider dual-sourcing strategies and safety stock policies for critical inputs to reduce single-point-of-failure risk.
Warranties, Indemnification, and Limitation of Liability
Contractual warranties should address conformity to specifications, merchantability, and compliance with laws. The co-packer typically warrants that products are manufactured in accordance with CGMP, are free from adulteration and misbranding, and conform to agreed specifications. The brand may warrant that formulas, labels, and claims do not infringe third-party rights and comply with applicable regulations. Warranties should be time-limited but aligned with shelf life and reasonable discovery periods.
Indemnification must be carefully allocated. The co-packer should indemnify the brand for claims arising from manufacturing defects, contamination, or failure to follow specifications and SOPs. The brand should indemnify the co-packer for claims arising from label content, formula design defects, or marketing claims. The agreement should specify procedures for tendering claims, control of defense, and cooperation obligations, including preservation of evidence and access to records.
Limitations of liability are often the most negotiated terms. Some parties attempt to exclude all consequential damages, which may be unrealistic in a retail-driven environment where chargebacks and lost promotions are foreseeable. Consider tailored carve-outs for recall costs, fraud, gross negligence, willful misconduct, and breaches of confidentiality. Caps tied to fees paid over a defined period are common, but they should be evaluated in light of the realistic exposure landscape, including retailer penalties and brand equity damage.
Insurance Requirements and Risk Transfer
Insurance is a practical backstop to contractual risk allocation. The agreement should mandate minimum coverage types and limits, including commercial general liability with product liability coverage, product recall expense insurance, workers’ compensation, and, as appropriate, automobile liability and umbrella/excess liability. For certain products, contaminated products insurance and errors and omissions coverage may be warranted. Require the brand to be named as an additional insured on relevant policies and to receive certificates of insurance annually.
Policy details matter. The agreement should specify coverage triggers, retroactive dates for claims-made policies, per-occurrence and aggregate limits, and notification obligations for cancellation or material changes. Define whether insurance must be primary and noncontributory and whether waivers of subrogation are required. Because recall insurance varies widely by form, the contract should identify covered costs (e.g., retrieval, disposal, PR, extra labor, retailer penalties) and exclusions to avoid a false sense of security.
Many assume that insurance will “cover everything.” It will not. Exclusions for mislabeling, known defects, or failure to follow specifications can bar coverage. The agreement should therefore include a mechanism for periodic coverage reviews with brokers and should align indemnity obligations with insurable risks to avoid uncovered exposures that could imperil both parties.
Recalls, Withdrawals, and Crisis Management
Recalls are operational, legal, and reputational crises. The agreement must include a detailed recall and withdrawal protocol identifying who can initiate, how decisions are made, the roles of each party, and how costs are allocated. Define thresholds for action, lot identification procedures, and communication plans for regulators, retailers, and consumers. Establish a 24/7 contact tree and escalation path, and require periodic mock recalls to test traceability and response times.
Cost allocation should be tied to root cause. If contamination arises from a co-packer’s deviation from SOPs, the co-packer should bear direct costs and consequential retailer penalties within agreed limits. If the brand provides erroneous artwork causing an allergen mislabeling event, the brand should bear those costs. The agreement should require incident investigations and root cause analyses with documented corrective and preventive actions.
It is a misconception that recalls are purely a manufacturing problem. Supply chain partners, distribution centers, and retailers must be coordinated to retrieve product efficiently. The contract should address returned goods processing, quarantine and destruction protocols, media and consumer communications, and preservation of evidence for subrogation or recovery actions against upstream suppliers whose materials caused the issue.
Term, Termination, and Transition Assistance
Co-packing relationships evolve, and the agreement must provide for a defined term, renewal options, and termination rights for cause (e.g., significant quality failures, regulatory sanctions, insolvency) and for convenience with adequate notice. Remedies short of termination, such as cure periods, heightened oversight, or probationary status, may preserve supply continuity while addressing performance issues.
Upon termination, transitioning production is often more expensive and time-consuming than anticipated. The contract should require transition assistance, including cooperation to transfer tooling, molds, artwork files, and quality documentation; assignment of open purchase orders for ingredients and packaging; and reasonable continued production during a wind-down period. Address repurchase of branded materials at cost, destruction or return of confidential information, and access to retained samples and batch records for regulatory or litigation purposes.
Laypersons often overlook the need for post-termination non-use and non-disclosure safeguards, especially where the co-packer has developed specialized processing methods for the product. Include enforceable obligations and, where permitted, narrowly tailored non-solicitation restrictions covering the brand’s key customers and suppliers for a defined period, to prevent opportunistic disintermediation.
Dispute Resolution, Governing Law, and Remedies
Disputes in co-packing relationships are inevitable and should be channeled into an efficient resolution process. The agreement should specify governing law and venue, require senior-level negotiations before escalation, and consider mediation as a precondition to litigation or arbitration. For highly technical disputes, expert determination mechanisms for narrow issues (e.g., testing validity, process capability) can be faster and less costly than general arbitration.
Arbitration clauses require careful drafting. Consider whether emergency relief is available for injunctions (e.g., to stop misuse of trade secrets), whether class actions are waived, and what discovery is permitted. In court-based litigation, exclusive jurisdiction provisions and waiver of jury trial (where enforceable) may reduce uncertainty. Include attorneys’ fees provisions to encourage timely settlement of meritorious claims.
Remedies should be tailored to the specific risks of food manufacturing. Service credits for missed KPIs, rework obligations, and replacement production slots are practical, but do not ignore equitable relief for confidentiality breaches or IP misuse. A misconception is that damages caps will automatically control risk; in practice, carve-outs for recall and IP breaches are typically required to balance fairness and deterrence.
Data, Traceability, and Documentation Control
Reliable data flow between brand and co-packer is indispensable. The agreement should mandate traceability from raw materials through work-in-process to finished goods, with lot codes that are decipherable and consistent across cases and pallets. Require electronic batch records where feasible, secure retention of records for agreed periods aligned with shelf life and regulatory expectations, and timely delivery of certificates of analysis, temperature logs, and sanitation records.
Systems integration is often underestimated. Specify data formats for forecasts, purchase orders, Advanced Ship Notices, and inventory reports, and establish cybersecurity safeguards for any shared portals or EDI connections. Assign responsibility for master data management, including SKU setup, bill of materials maintenance, and version control for formulas and artwork.
Many brand owners assume that documentation will be retrievable on demand. Without contractual requirements and periodic audits of records management, retrieval during a regulatory inspection or recall can be chaotic. Include rights to access and copy records, retention timelines, and obligations to implement backup and disaster recovery procedures to preserve critical production and quality data.
Sustainability, Environmental Compliance, and Waste Management
Retailers and consumers increasingly expect environmental and social responsibility. The agreement should address environmental compliance, including wastewater discharge permits, air emissions, hazardous materials handling, and waste disposal methods. Define disposal responsibilities for off-spec or expired product and require documented destruction where appropriate to prevent gray market diversion.
Packaging sustainability goals should be explicit: recycled content targets, recyclability, compostability, or reusable systems where applicable. If renewable energy or carbon accounting claims are part of the brand’s positioning, the co-packer’s role in data collection, verification, and certifications must be clearly stated. Require chain-of-custody documentation for materials tied to specific claims, and align marketing timelines with certification audits to avoid misleading statements.
It is a misconception that sustainability commitments are costless add-ons. They affect material selection, line speeds, seal integrity, and shelf life. The agreement should contemplate pilot trials for new materials, cost-sharing for equipment modifications, and measurement of sustainability KPIs. Noncompliance with environmental laws or unsupported green claims can lead to enforcement and litigation, so allocate responsibility for monitoring legal developments and updating labels and marketing accordingly.
Certifications and Special Processing Requirements
Products that carry organic, non-GMO, kosher, halal, gluten-free, allergen-free, or fair-trade certifications require stringent controls. The agreement should obligate the co-packer to maintain required certifications, to support certification audits, and to implement segregation, sanitation, and verification protocols necessary to maintain claim integrity. Include requirements for rabbinical or halal supervision where necessary and for specific allergen-clean validations and testing between runs.
For thermal processing, aseptic filling, retorting, or high-pressure processing, specialized validations and oversight may be legally required. The contract should define who engages process authorities, who pays for validations and periodic revalidations, and how deviations are handled and documented. The parties should agree on hold-and-release procedures pending lab results when safety hinges on validated outcomes.
Brands often underestimate the cost and lead time of achieving and maintaining these certifications. The agreement should clearly state the consequences if a certification lapses, including suspension of production for affected SKUs, notification obligations to customers, and cost allocations for relabeling or product withdrawal if claims become invalid.
Equipment, Tooling, and Capital Investments
Many projects require dedicated tooling or equipment modifications. The agreement should set forth who funds capital expenditures, who owns the equipment or tooling, and who is responsible for maintenance, calibration, and repairs. If the brand funds equipment, negotiate ownership or a security interest, installation standards, and a right to remove equipment upon termination without disrupting the co-packer’s operations.
Capacity reservation and line access must be addressed. If the brand pays for line upgrades or dedicated change parts, it should receive priority scheduling or guaranteed run rates documented as part of the service levels. Conversely, the co-packer may require volume commitments or take-or-pay terms to justify investment. Include depreciation schedules and buyout provisions to handle early termination scenarios fairly.
A common misconception is that equipment lead times and validation are trivial. In reality, long lead items, factory acceptance tests, site acceptance tests, and operator training can extend timelines by months. The contract should incorporate realistic schedules, contingency plans, and responsibilities for regulatory notifications or revalidations tied to equipment changes.
Labor, Health and Safety, and Access Rights
The agreement should require the co-packer to comply with labor laws and workplace safety standards, including OSHA requirements, training for temporary workers, and protocols for personal protective equipment and hygiene. Access by the brand’s personnel for audits or line trials should be governed by safety orientations, confidentiality, and noninterference obligations to avoid disrupting operations or creating safety hazards.
Security and visitor policies must be respected. The contract should define procedures for scheduling visits, escort requirements, photography restrictions, and handling of proprietary observations. For products with heightened security concerns, implement food defense measures and background checks where appropriate, consistent with legal requirements and nondiscrimination obligations.
It is a mistake to assume that the brand can walk in at any time and direct operators. The co-packer controls its workforce and safety systems. The agreement should balance necessary oversight with respect for operational control, ensuring that the brand’s presence enhances compliance rather than creating conflicting instructions or safety risks.
Tax, Customs, and Cross-Border Considerations
Tax and trade issues can materially affect landed cost and compliance. If production spans multiple jurisdictions, the agreement should address sales and use tax, excise tax, and customs duties. Clarify who is the importer or exporter of record, who prepares customs documentation, and how tariff classifications are determined and updated. If duty drawback or free trade preferences are available, assign responsibility for qualification and recordkeeping.
Transfer pricing can arise when related parties are involved or when intellectual property is licensed to the co-packer. The agreement should be consistent with arm’s-length pricing principles and supported by contemporaneous documentation. For excisable products such as alcohol, special licensing and bonded warehouse requirements may apply, along with tax stamps and reporting obligations. These must be addressed explicitly to prevent regulatory violations and unexpected liabilities.
A frequent misconception is that tax and customs are “back-office” concerns. In practice, errors trigger shipment holds, penalties, and costly rework, especially for products with complex ingredient origins. The contract should require cooperation in audits, retention of trade documents, and prompt sharing of data necessary for accurate filings and certifications.
Putting It All Together: Governance and Continuous Improvement
Even a well-drafted agreement fails without active governance. Establish a joint steering committee or business review cadence to monitor KPIs, review audit findings, track cost improvement projects, and plan capacity for upcoming promotions and product launches. Minutes, action items, and accountability assignments are essential. Include a change log for specifications, artwork, and supplier approvals.
Operational excellence depends on continuous improvement. The contract should encourage structured initiatives such as yield improvement projects, line speed optimization, and waste reduction, with shared savings mechanisms to align incentives. Define how ideas are proposed, evaluated, and implemented, and how IP in process improvements is treated to avoid later disputes.
Finally, ensure the agreement is a living document. Incorporate amendment procedures that allow updates through signed change orders or revised exhibits, and maintain a master index to prevent version confusion. The complexity of modern food manufacturing means that “set it and forget it” is not realistic. Professional legal and technical support is indispensable for drafting, implementation, and ongoing governance.
Practical Checklist: Questions to Address Before Signing
Before execution, both parties should complete a disciplined review focusing on the most litigation-prone issues. While every relationship is unique, the following checklist highlights areas that deserve heightened attention. Addressing these items upfront reduces ambiguity and aligns expectations, saving significant cost and disruption later.
- Who owns formulas, process parameters, and any improvements? What assignments are signed?
- What are the exact product and packaging specifications, test methods, and acceptance criteria?
- How will forecasts, firm windows, and capacity reservations be managed and enforced?
- What are the change control gates for ingredients, suppliers, and labels?
- How are nonconforming products dispositioned and who pays for rework or destruction?
- What are the recall protocols, decision rights, and cost allocations?
- What insurance limits and endorsements are required, and are they actually available?
- What third-party certifications are required and how are audits handled?
- How will pricing adjust for commodities, labor, and regulatory changes, and what audit rights exist?
- What are the termination rights, transition assistance obligations, and post-termination protections?
A seasoned attorney and CPA can translate these questions into actionable, enforceable provisions integrated with your operational realities. The stakes are significant: missed details cascade into supply disruptions, regulatory exposure, and brand damage. Investing in a rigorous contracting process pays for itself many times over in stability, predictability, and growth capacity.
