The security and defence industry is entering a period of significant growth. For established manufacturers as well as new technology providers, this is not merely a matter of securing additional contracts. The real challenge lies in transforming development work, pilot projects and individual procurement contracts into robust production, supply and service relationships.

Initially, the focus is often on technical and regulatory requirements. The military client – such as the German Bundeswehr – sets out detailed specifications regarding technology, materials, IT and security standards. These specifications play a decisive role in determining the requirements for the product. However, they do not replace the contractual framework governing the supply relationship.

The contract is what ultimately determines who maintains capacity, how quantities and forecasts interact, who bears the costs and risks of changes, and what the consequences of supply disruptions are. Particularly in the case of long-term defence projects, contract drafting thus becomes a key commercial instrument.

Building Capacity: Predictability for both sides

The transition from development and testing to series production significantly alters the economic framework. Production capacity must be built up, tooling financed, components procured at an early stage, and delivery dates reliably met.

Framework and series contracts must therefore be drafted in such a way that they distinguish, in particular, between non-binding forecasts and binding call-offs, and specify the capacity the supplier must maintain. Provisions should also be made regarding who bears the costs for safety stock, tooling or components not called off.

Predictability is particularly important for suppliers, especially where significant investments are involved. At the same time, the client requires sufficient flexibility to be able to respond to changing requirements. Contractual mechanisms for changes in quantities, capacity adjustments and technical modifications must therefore be taken into account from the outset.

Contractually Securing Supply

In the defence sector, supply capability does not usually depend solely on a supplier’s own production capacities. Bottlenecks in electronics, specialised materials, software or intermediate products can disrupt the entire supply chain.

For this reason, the management of strategic suppliers is an integral part of commercial contracting. This includes, in particular, early warning and information obligations, capacity commitments, quality requirements and, where necessary, audit and monitoring rights, as well as specifications regarding alternative sources of supply.

A coherent back-to-back structure is of particular importance here: obligations towards the customer should,  where commercially sensible and legally possible, be mirrored in the contractual arrangements with key suppliers. This applies not only to delivery times but also to warranties, liability, technical changes and compliance requirements.

Even during the contract term, contractually relevant dependencies and changes in the supplier structure should be reviewed regularly.

Pricing and Change Management: Clearly Allocating Risks

Defence projects often run over long periods. Between the conclusion of the contract, development and series production, costs, technical requirements and production conditions can change significantly. A contract must therefore not only reflect the initial situation but also provide for a reliable mechanism to manage changes.

Price changes and technical modifications are particularly relevant. Price escalation or adjustment mechanisms can account for cost increases arising from defined factors. A clearly defined change management process sets out how changes are requested, assessed and approved, and what impact they have on price, delivery dates and capacity.

The allocation of risk in the event of delivery delays and failures to perform should also correspond to the parties’ actual spheres of influence and control. In this context, liability limits and contractual penalties, as well as the possibility of passing on risks to one’s own suppliers, must be factored into the risk allocation.

The aim is a contractual structure that provides economic predictability without losing the necessary flexibility for a changing defence project.

Innovation Requires a Contract That Can Evolve

New technologies often enter the defence market via development partnerships, pilot projects or individual procurements. This applies in particular to areas such as software, AI, sensor technology, robotics and communications.

However, particularly in the case of development partnerships and pilot projects, the contract should already take the next stage of development into account. In particular, development objectives and acceptance criteria, the financing of qualification and production ramp-up, as well as the rights to development outcomes and further developments, must be clarified.

The conditions for a subsequent move to series production must also be defined at an early stage – for example, with regard to capacity commitments or minimum purchase quantities. Involving key suppliers as early as the development phase can also help to ensure subsequent technical and economic feasibility.

Commercial contracting can thus lay the groundwork, even during the development phase, for innovation to become scalable.

ESG and Compliance along the Supply Chain

ESG and compliance requirements are also increasingly shaping long-term defence supply relationships. Where necessary, the customer’s requirements must be implemented and verified throughout the entire supply chain.

In terms of contract drafting, this means that requirements should not simply be passed on via general supplier codes of conduct. Obligations regarding information, documentation and cooperation, as well as necessary monitoring and audit rights, should be clearly regulated and aligned with the company’s own obligations towards its suppliers.

Supply relationships beyond delivery

The commercial relationship does not end with the delivery of the product. Spare parts logistics, maintenance, repairs, software updates or technical services can remain part of the contractual relationship for years to come.

Clear framework conditions must also be established in the contract for these aspects, for example, regarding spare part availability, service levels, response times and responsibilities.

Commercial Contracting as the Foundation for Defence Growth

Successfully scaling up defence business involves more than simply developing and delivering a product that meets technical specifications. Companies must build capacity, secure supply chains and translate innovations into viable, long-term supply relationships.

Commercial contracting provides the framework for this. A key factor is a contract structure that balances volumes and capacities, distributes risks appropriately along the supply chain and, at the same time, offers sufficient flexibility to accommodate technical and economic changes.

Those who take these factors into account at an early stage in contract drafting lay the foundations not only for a single contract, but for long-term supply capability, innovation and growth in the defence sector.