Development milestone payments: Overview, definition, and example
What are development milestone payments?
Development milestone payments are payments made to a party (often in a research, development, or technology agreement) when specific, predefined stages or achievements in a project are reached. These payments are typically tied to significant project milestones, such as completing a prototype, reaching a regulatory approval, or achieving a particular level of progress in development.
Why are development milestone payments important?
Development milestone payments are important because they help mitigate financial risk for both parties in a project. For the developer, these payments provide a steady cash flow as they progress through the stages of development. For the payer (often an investor or partner), they ensure that the developer is meeting agreed-upon progress markers before additional funds are released. This structure helps maintain accountability and can encourage project completion on time.
Understanding development milestone payments through an example
In a pharmaceutical development agreement, a drug company might agree to pay a research firm $1 million after successfully completing Phase 1 clinical trials. If the research firm then progresses to Phase 2 trials, the agreement might specify an additional payment of $2 million. These payments are only made when the firm reaches specific, measurable goals, ensuring that both sides are aligned and that funds are used effectively.
Example of a development milestone payments clause
Here’s how a development milestone payments clause may appear in a contract:
"The Company shall pay the Developer the following milestone payments upon the completion of each phase of the project: (i) $500,000 upon completion of Phase 1, (ii) $750,000 upon successful testing and approval by [regulatory body], and (iii) $1,000,000 upon full commercial launch of the product."
Conclusion
Development milestone payments provide a clear, structured way to fund projects while ensuring both parties meet agreed-upon goals. By tying payments to specific milestones, businesses can protect themselves from financial risk and incentivize steady progress throughout the development process.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.