Consignment stock: what to agree before it arrives
- Title transfer needs a precise trigger written into the agreement - physical draw-down, a usage report date, or payment - not a vague statement that it transfers when the goods are used.
- The consignee should insure consignment goods from the moment of delivery, with the supplier named as loss payee, because standard premises policies often exclude goods not owned by the business.
- Usage reporting frequency, format, and submission deadline must be written into the agreement before the first delivery, or invoicing becomes a negotiation after the fact.
- Surplus stock at the end of an arrangement needs a return window and a reconciliation process - goods not returned within the agreed period should be treated as consumed and invoiced at the agreed price.
- A one-page consignment agreement covering title, insurance, reporting, and surplus stock eliminates almost all disputes that commonly arise in consignment arrangements.
Consignment stock puts a supplier's goods at your premises while ownership stays with them. Four clauses decide how the arrangement works: title transfer, insurance, usage reporting, and what happens to surplus stock at the end.
Consignment stock is goods a supplier places at your premises - or that you place at a customer's premises - while ownership stays with the supplier until the goods are drawn down and used. It reduces the buyer's working capital commitment and gives the supplier a guaranteed outlet, which makes it a common arrangement across construction, distribution, and manufacturing supply chains. Without a written agreement, every practical question about the arrangement becomes a dispute waiting to happen. Four questions cover almost everything that goes wrong: when does title transfer, who insures the goods while they sit on site, how is usage reported back to the supplier, and what happens to stock that is still there when the arrangement ends. A single-page agreement that settles all four before the first pallet moves eliminates the disputes almost entirely.
Title: when does ownership transfer?
The defining feature of consignment stock is that the supplier keeps title until the goods are drawn down. But "drawn down" needs a precise definition, or the moment of transfer is open to interpretation. In most agreements, title passes when goods are physically removed from the consignment location and used in production, incorporated into a job, or allocated to a specific order. Some agreements use a different trigger: the consignee issues a draw-down request or usage report, and title passes on the date of that report rather than the date of physical use.
The practical consequence matters more than the legal phrasing. If the buyer goes into insolvency while holding consignment stock, goods that are still owned by the supplier can be recovered by an administrator; goods where title has already passed cannot. The agreement should state the exact trigger for title transfer, whether partial draws are permitted, and what records evidence the transfer for both parties.
Insolvency protection
In jurisdictions that recognize retention of title, unconsumed consignment stock can be recovered from an insolvent consignee - but only if the goods are identifiable and have not been mixed with other materials. If the goods are likely to be mixed (bulk components, raw materials), address this scenario explicitly in the title clause.
See also free issue materials for how the ownership question plays out differently when a main contractor supplies materials to a subcontractor for incorporation into works.
Insurance: who covers the stock while it is on site?
Once goods are at the consignee's premises, the supplier no longer controls the storage conditions, security, or fire risk. Yet if title has not transferred, the goods remain legally the supplier's property. This creates a coverage gap unless the agreement assigns insurance responsibility clearly.
The standard approach is for the consignee to insure the goods against loss, damage, and theft from the moment of delivery, at a value no less than the agreed unit price multiplied by the quantity currently on site. The supplier is named as loss payee or co-insured on the policy. This means that if goods are destroyed by fire or stolen, the insurance payout goes to the supplier whose property was lost, rather than to the consignee.
Check the policy wording
Standard premises insurance typically covers stock "belonging to the business." Consignment goods technically belong to the supplier, not the consignee, so they may fall outside the standard policy. Make sure the consignee's insurer extends cover to goods held on consignment, or arrange a separate named policy for the consignment stock.
The agreement should also assign transit risk. The consignor typically bears risk during shipping; the consignee bears risk from the moment of signed acceptance. The delivery note - signed by the consignee at the point of receipt - is the boundary marker between the two periods. Any visible damage or shortfall should be noted on the delivery note before it is signed, because signed acceptance without notation is usually treated as acceptance in good condition.
Reporting: how does the supplier know what has been used?
Without reliable usage reporting, the supplier cannot invoice accurately and the consignee cannot reconcile its stock records. Reporting is where most operational disputes in consignment arrangements originate - not because either party is acting in bad faith, but because reporting frequency, format, and timing were never agreed in writing.
The agreement should define four things: the reporting frequency (weekly, fortnightly, or monthly - whichever matches the pace of usage and the supplier's invoicing cycle), the format of the report (a draw-down log showing item description, quantity consumed, date of use, and reference job or order number), the submission deadline (a fixed number of business days after each period end), and the supplier's audit right (the ability to physically count stock with reasonable written notice and reconcile the count against submitted reports).
Link reporting to your inventory system
If the consignee manages stock digitally, the usage report can be generated directly from the system rather than assembled manually. Tying draw-down records to job numbers or purchase orders provides a ready audit trail. Zigaflow's inventory tracking captures draw-down activity at the item level, which makes generating accurate periodic reports straightforward and eliminates the need for separate manual logs.
Payment terms are typically triggered by the usage report. The supplier invoices for the quantity reported as consumed, with payment due on agreed net terms from invoice date. If the consignee delays reporting, payment is correspondingly delayed. The agreement should therefore include a provision that treats goods as consumed - and invoiceable at the reported or estimated quantity - if a usage report is not submitted within an agreed number of days after the period closes.
Surplus stock: what happens to what is left?
Every consignment arrangement eventually ends - because the project completes, the commercial relationship changes, or one party serves notice. At that point, there is almost always some stock remaining on site. Without an agreed return procedure, leftover goods become a negotiation.
Three scenarios need covering.
Planned end of the arrangement: The consignee gives the supplier notice within an agreed period, typically 30 to 60 days. All unconsumed stock is counted, reconciled against the running usage log, and collected by the supplier or dispatched at the supplier's cost within an agreed number of working days. Any stock that the consignee cannot locate at reconciliation is treated as consumed and invoiced at the agreed unit price.
Agreed disposal or substitution: If the consignee needs to clear slow-moving consignment goods before the arrangement formally ends, any disposal - including use in a lower-value application or donation - requires the supplier's written approval and is invoiced at the agreed unit price.
Termination for cause or insolvency: The supplier has the right to collect all identified and segregated goods immediately, without waiting for a formal reconciliation process. This reinforces the practical importance of keeping consignment stock physically separate and clearly labeled with the supplier's name throughout the arrangement, not just at the start.
Segregation protects both parties
Consignment stock that is mixed with the consignee's own inventory is much harder to recover in an insolvency - and creates disputes about quantities even in ordinary circumstances. Require the agreement to specify that consignment goods are stored in a designated area, labeled as the supplier's property, and recorded separately in the consignee's stock system.
For businesses using a vendor-managed inventory model - where the supplier also manages replenishment rather than the consignee - the surplus-stock clause should account for goods topped up between reporting periods and any buffer stock the supplier holds on site to cover forecast demand.
A short, well-drafted consignment agreement does not need to be a complicated document. Four clauses - title, insurance, reporting, and surplus - cover the points where disputes consistently arise. Getting agreement on all four before the first delivery is the only reliable way to prevent them.
Sources
- What Is A Consignment Agreement?Sprintlaw UK · accessed 2026-09-18
- Free Consignment Agreement Template + Clause Guide [2026]HyperStart · accessed 2026-09-18
- Risk and Insurance of Consignment Stock Sample ClausesLaw Insider · accessed 2026-09-18
- Consignment agreement templateFynk · accessed 2026-09-18