Have you ever wondered how an organisation calculates the contract value? Below is a short explanation on how to calculate contract value.
The rule of thumb is to calculate based on the total lifetime of the contract and excluding VAT.
* If there is no fixed price and:
the contract term is for 4 years or less, the organisation should estimate the amount of money it expects to pay over the contract and use this figure (typically organisations choose to use 2+1+1
If the organisation is a public sector organisation and recognised as a contracting authority & intends to let more than one contract to fulfil a single requirement, the contract value over the total lifetime should be added together. The aggregate figure is then used to calculate if the threshold was exceeded.
Its worth noting that a contract can be for a specific term or it can be called off using a framework. The difference is that a term contract requires more certainty and usually involves a minimum payment and is more suitable where the requirements are known and regular.
A framework agreement is different because this is a framework for which shortlisted suppliers are added and only the suppliers on a particular framework are invited to bid. In this instance there is no minimum contract value and the organisation will compete their requirements each time and the contract is created after each competition. This is known as a call-off contract.
The contract value should also be based on the total cost of ownership i.e. any additional cost that will be incurred to support the main elements of the contract this could be cost such as maintenance, hosting cost, repairs, parts etc.