Contract Red Flags Every Manufacturing CEO Should Catch Before Signing

As a manufacturing CEO, you sign contracts constantly.  Supplier agreements, customer terms, equipment leases, service contracts. Most seem straightforward. Many use “standard” language that feels familiar.

But buried in that familiar language are clauses that can create enormous liability, lock you into unfavorable arrangements, or sign away rights you didn’t know you were giving up.

Here are the red flags that should trigger a closer look before you sign.

RED FLAG #1: INDEMNIFICATION CLAUSES THAT GO TOO FAR

Indemnification clauses determine who pays when something goes wrong. In manufacturing, they’re particularly consequential—product liability claims can be enormous.

Watch for: Language that requires you to indemnify the other party for their own negligence, or for claims arising from their modification or misuse of your products. A reasonable indemnification clause is mutual and limited to each party’s own actions.

The risk: Signing a broad indemnification clause means you could be paying for problems you didn’t cause. In manufacturing contexts, this can mean absorbing liability for defects introduced after your product leaves your facility.

RED FLAG #2: LIMITATION OF LIABILITY THAT ONLY PROTECTS THEM

Most commercial contracts cap liability. But these caps should work both ways.

Watch for: Contracts where your liability is uncapped or capped at a high multiple of contract value, while their liability is capped at fees paid or some nominal amount. Also watch for carve-outs that expose you to unlimited liability for certain categories.

The risk: Asymmetric liability caps mean your exposure is disproportionate to theirs. This is especially dangerous with vendors whose failures could shut down your production.

RED FLAG #3: INTELLECTUAL PROPERTY OWNERSHIP LANGUAGE

When you work with customers on custom products or with vendors on process improvements, intellectual property questions arise. The contract language determines who owns what.

Watch for: Language that assigns all IP created “in connection with” the agreement to the other party. This can sweep in your pre-existing IP, your improvements, and innovations that have nothing to do with them.

The risk: You could inadvertently sign away ownership of processes, designs, or innovations that took years to develop—or be blocked from using improvements you make to your own operations.

RED FLAG #4: FORCE MAJEURE AND SUPPLY CHAIN RISK

Recent years have taught every manufacturer about supply chain vulnerability. Your contracts should address these realities.

Watch for: Force majeure clauses that protect them but not you. Contracts that require performance regardless of supply chain disruption. Penalty clauses that ignore the realities of material shortages.

The risk: Being held to delivery commitments when circumstances beyond your control prevent performance, while your suppliers face no reciprocal obligations.

RED FLAG #5: TERMINATION AND EXCLUSIVITY TRAPS

How contracts end matters as much as how they operate. And exclusivity commitments can constrain your business in ways that aren’t immediately apparent.

Watch for: Termination provisions that require long notice periods or impose significant exit costs. Exclusivity language that prevents you from working with competitors—or their definition of “competitor.” Requirements that survive termination indefinitely.

The risk: Getting locked into relationships you can’t exit, or finding that commitments you made to one customer block opportunities with others.

RED FLAG #6: AUTO-RENEWAL AND EVERGREEN CLAUSES

The most dangerous clauses are often the ones easiest to overlook—buried in boilerplate at the end of the agreement.

Watch for: Auto-renewal provisions with short cancellation windows. Evergreen clauses that extend agreements indefinitely unless actively terminated. Price escalation provisions tied to renewal.

The risk: Multi-year commitments you didn’t intend to make, at prices you didn’t intend to pay, because you missed a 30-day window in a contract you assumed was year-to-year.

WHEN TO ESCALATE TO LEGAL REVIEW

Not every contract needs comprehensive legal review. But these triggers should prompt a closer look:

Any agreement with uncapped or high-cap liability exposure. Any contract lasting more than one year or involving significant minimums. Any vendor critical to your production. Any customer representing more than 10% of revenue. Any agreement involving IP rights, exclusivity, or non-compete provisions. Any contract that feels unusually one-sided or includes terms you don’t fully understand.

THE FIVE-MINUTE QUESTION APPROACH

Many of these red flags can be identified with a quick conversation—the kind of conversation that happens naturally when you have accessible legal counsel. That’s the value of the Outside GC model: you don’t have to calculate whether a contract question is worth a call. You just ask.

Because the most expensive contract terms are the ones you didn’t notice until it was too late.

Let’s talk about how proactive contract review could protect your manufacturing business.