TCV, committed value and the value with options answer three different questions, and the approval threshold depends on which one you use.
Total contract value (TCV) is every amount the contract is expected to pay over its firm term: price times forecast volume year by year, with the price path the indexation clause produces, plus recurring fees and one-off charges, and without unexercised options. On an illustrative three-year supply agreement at 104.00 a unit, TCV is 17,538,458.88, not the 15,828,000.00 that year one times three, plus tooling, suggests. The amount the buyer is actually bound to pay, its committed minimum, is 14,837,088.00, and the two extension options would add another 13,913,766.48.
Worked in full in Contract Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A supply agreement rarely has a single number on it. The price moves with an index, volumes are forecast rather than fixed, a minimum commitment sets what the buyer must pay whatever it orders, and extension options sit at the buyer's discretion. Each of those produces a different "value", and each answers a different question:
Annual contract value (ACV) is the recurring part of TCV per year, and it is the figure to compare with annual budgets.
| Input | Value |
|---|---|
| Unit price, year 1, firm | 104.00 |
| Forecast price adjustment from year 2, a year | 4.0% |
| Forecast units, years 1 to 3 | 50,000 / 53,000 / 56,700 |
| Minimum committed units a year | 45,000 |
| Annual service fee | 36,000.00 |
| Tooling, one-off | 120,000.00 |
| Extension options, two one-year terms, forecast units | 58,000 each |
The 4.0 per cent is a forecast of what the price adjustment formula will produce, not a contractual figure. How a formula of that kind moves a price is worked in how a price adjustment formula works in a supply contract.
Price in year t = year-1 price × (1 + index)t−1
TCV = Σ (pricet × forecast unitst) + recurring fees + one-off charges, over the firm term
Committed value = Σ (pricet × minimum units) + fees + one-off charges
Excel, prices in B2:B4 and units in C2:C4: =SUMPRODUCT(B2:B4,C2:C4)+3*Fee+Tooling
| Year | Unit price | Units | Spend | Fee | Total |
|---|---|---|---|---|---|
| 1 | 104.00 | 50,000 | 5,200,000.00 | 36,000.00 | 5,236,000.00 |
| 2 | 108.16 | 53,000 | 5,732,480.00 | 36,000.00 | 5,768,480.00 |
| 3 | 112.4864 | 56,700 | 6,377,978.88 | 36,000.00 | 6,413,978.88 |
| Tooling | 120,000.00 | ||||
| TCV | 17,310,458.88 | 108,000.00 | 17,538,458.88 |
Carry the price unrounded, 112.4864 rather than 112.49, because the indexation clause will. ACV, the recurring part per year, is (17,310,458.88 + 108,000.00) ÷ 3 = 5,806,152.96; the tooling is a one-off and stays out of it. Year-one ACV is lower, 5,236,000.00, because volumes ramp and the price rises.
If the buyer orders only its 45,000-unit minimum, it still pays the indexed price on those units: 324.6464 of price across the three years times 45,000 is 14,609,088.00, and with fees and tooling 14,837,088.00. That is 84.6 per cent of TCV. The 2,701,370.88 above it is forecast, not obligation, which is the supplier's volume risk and the buyer's flexibility. A minimum below forecast is worth something to the buyer; what a shortfall surcharge does to that flexibility is in what a minimum volume surcharge costs per unit short.
| Option year | Unit price | Units | With fee |
|---|---|---|---|
| 4 | 116.99 | 58,000 | 6,821,179.65 |
| 5 | 121.67 | 58,000 | 7,092,586.83 |
| Options | 13,913,766.48 |
With both options the potential value is 31,452,225.36, 79.3 per cent more than the firm TCV. Report it separately and label it; adding it into TCV turns a three-year commitment into a five-year one on paper.
| Index a year | TCV, firm term | Committed value | With options |
|---|---|---|---|
| 0.0% | 16,836,800.00 | 14,268,000.00 | 28,972,800.00 |
| 2.0% | 17,185,270.72 | 14,550,672.00 | 30,187,708.17 |
| 4.0% | 17,538,458.88 | 14,837,088.00 | 31,452,225.36 |
| 6.0% | 17,896,364.48 | 15,127,248.00 | 32,767,834.01 |
| 8.4% | 18,332,078.22 | 15,480,382.08 | 34,416,126.62 |
Indexation alone is worth 701,658.88 of TCV at 4.0 per cent, the gap between the 0.0 and 4.0 per cent rows. That amount belongs in the approval paper as a forecast, with the index assumption stated next to it.
Multiplying year one by the term. 5,236,000.00 × 3 plus tooling is 15,828,000.00, which understates TCV by 1,710,458.88, 9.8 per cent, because it ignores both the volume ramp and the price path. The error has consequences beyond the forecast. Suppose contracts above 15,000,000 need board approval. The firm TCV is 2,538,458.88 above that line and the year-one shortcut only 828,000.00 above it, so both go to the board, but measured on the committed value, 162,912.00 below the threshold, the same contract would not. State in the delegation policy which value the threshold is measured on, because the choice decides who signs.
The book's own case prices a supply agreement the same way, over 159,700 units and three years, and the free workbooks for this book strike its price paths quarter by quarter from the indexation terms.
TCV is the whole expected value of the firm term, including one-off charges; ACV is the recurring part per year. On the illustrative agreement TCV is 17,538,458.88 over three years, including 120,000.00 of tooling, and ACV is 5,806,152.96 a year on average. Year-one ACV is lower, 5,236,000.00, because volumes ramp and the price is indexed upwards.
Not in TCV. Options are at one party's discretion, so they belong in a separate potential value. On the illustration two one-year options at 58,000 units add 13,913,766.48, taking the potential value to 31,452,225.36, 79.3 per cent more than the firm TCV of 17,538,458.88. Some approval policies use the potential value; the policy should say so.
The value the buyer must pay whatever it orders: the minimum committed volume at the contract price path, plus fixed fees and one-off charges. With a 45,000-unit minimum against forecasts of 50,000 to 56,700, the illustrative agreement commits 14,837,088.00, 84.6 per cent of its TCV. The remaining 2,701,370.88 is forecast, not obligation.
This article is one calculation from Contract Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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