What is a tolling agreement in manufacturing?

A tolling agreement in manufacturing is a type of contract between two companies, where one company provides raw materials or semi-finished products to the other company for further processing or manufacturing. The company that provides the raw materials is referred to as the toller, while the other company is called the processor.

Under a tolling agreement, the toller supplies the raw materials and the processor provides the manufacturing equipment, labor, and other resources to process the raw materials into a finished product. The finished product is then sold by the processor, who typically retains ownership of the product and pays the toller a fee for the raw materials and processing services.

Tolling agreements are commonly used in the manufacturing industry to facilitate the efficient use of resources and to reduce costs for both parties. This type of agreement can be particularly beneficial for small companies that lack the resources to manufacture products on their own, as it allows them to utilize the equipment and expertise of a larger manufacturer.

Some of the key elements of a tolling agreement include the specific raw materials to be provided by the toller, the quality standards for the finished product, the payment terms for the tolling fees, and the length of the agreement. It is important for both parties to clearly define their respective roles and responsibilities, and to establish mechanisms for resolving any disputes that may arise during the course of the agreement.