# Material Costs > Material Costs means expenses for raw materials, intermediates, and packaging used in the manufacturing or repair process. **Term:** Material Costs **Last updated:** 2026-07-29 ## Definition ## What Material Costs Means in a Contract Material Costs is a defined term used to isolate the expense of physical inputs consumed when a product is manufactured, assembled, or repaired. It typically covers raw materials such as metals, plastics, or chemicals, intermediate components sourced from third parties, and packaging materials needed to prepare finished goods for delivery. The term exists so that parties can separate these input costs from other categories of expense, such as labor, machine time, energy, or administrative overhead. The purpose of defining Material Costs precisely is usually financial: it determines what can be invoiced, reimbursed, or used as the basis for a price adjustment clause. In a [Manufacturing Agreement](https://www.genieai.co/en-us/template-type/manufacturing-agreement), for example, a supplier may be entitled to pass through increases in Material Costs to the buyer, but only for the categories of expense that fall within the agreed definition. Anything outside that definition, such as staff wages or factory rent, would not qualify for pass-through treatment unless the contract says otherwise. ## How Material Costs Is Defined or Measured Most contracts measure Material Costs by reference to actual, documented supplier invoices for the specific inputs used in producing or repairing the goods in question. This approach ties the figure to verifiable third-party pricing rather than internal estimates, and it often requires the manufacturer to retain receipts or supplier statements that can be audited later. Some agreements instead use a standard cost or bill-of-materials approach, where Material Costs are calculated from a pre-agreed list of components and their unit prices, updated periodically. Definitions frequently specify what is excluded as much as what is included. Common exclusions are labor costs, factory overhead, depreciation of equipment, freight and duties, and profit margin. Some clauses also address whether scrap, wastage, or rework materials count toward the total, and whether volume discounts or rebates received by the manufacturer must be passed through to the counterparty. Because these details materially affect the final number, well-drafted contracts include a worked example or a reference schedule showing how the calculation is meant to work in practice. - Direct raw materials consumed in production - Intermediate or component parts purchased from suppliers - Packaging materials required for the finished product - Documented adjustments for waste, rebates, or discounts ## Where Material Costs Appears in Agreements The term is most common in manufacturing, supply, and repair contexts. It appears in a [Contract Manufacturing Agreement](https://www.genieai.co/en-us/template-type/contract-manufacturing-agreement) where a third-party manufacturer produces goods on behalf of a brand owner and needs a mechanism to recover input costs. It also shows up in repair and maintenance arrangements, including forms tied to a [Repair Request Form](https://www.genieai.co/en-us/template-type/repair-request-form), where Material Costs distinguishes the price of replacement parts from the labor charge for the repair itself. Beyond manufacturing agreements, the concept can surface in procurement contracts, price adjustment clauses, cost-plus pricing arrangements, and change order provisions used when the scope of a project shifts. Related documents such as a [Material Transfer Agreement](https://www.genieai.co/en-us/template-type/material-transfer-agreement) deal with a different concept, the transfer of physical materials between organizations, but the shared vocabulary can create confusion if the drafter is not careful to keep the definitions distinct within the same document set. ## Why the Exact Wording Matters Disputes over Material Costs usually arise not because the concept is unfamiliar, but because the definition is vague or inconsistent with how the parties actually operate. If a contract says Material Costs will be passed through. ## Context ### Relevant circumstances - When a company is purchasing raw materials for production. - When a company is engaging another to manufacture a product. - When a company is contracting maintenance or repair services. - When a product needs packaging for distribution. ### Relevant sectors - Manufacturing - Construction - Automobile - Retail ## Relevant contract types - [Manufacturing Agreement](https://www.genieai.co/en-us/template-type/manufacturing-agreement) - [Contract Manufacturing Agreement](https://www.genieai.co/en-us/template-type/contract-manufacturing-agreement) - [Repair Request Form](https://www.genieai.co/en-us/template-type/repair-request-form) --- This is the Markdown representation of [https://www.genieai.co/en-us/define/material-costs](https://www.genieai.co/en-us/define/material-costs), provided for AI agents and crawlers. The HTML page is canonical. 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