GlossaryKind of term: Cost and economicsFramework agreement
What is a framework agreement?
A framework agreement fixes price and terms for parts over a period; a call-off is an order placed under it, with its own quantity and delivery date.
It can cover one or more parts, often for a year, and besides price per piece and conditions it fixes the revision and an expected or committed total quantity. For example 400 flanges at rev C, called off in lots of 50. A call-off is an order placed under that agreement, carrying only a quantity and a delivery date; price and revision are already fixed. Whether the total is a commitment or a forecast depends on what the contract says. It is also known as a blanket or annual order.
How does a framework agreement work in practice?
You price the contract on the total, but the costs follow how you produce. Making each call-off separately means a new setup per call-off, with programming spread over the total; if that total is only a forecast, you carry the risk that it is not reached. Making larger batches to stock saves setup time but leaves you carrying stock, storage space and the risk that a revision change makes the stock unusable. So agree a minimum call-off quantity, a delivery period per call-off, what happens if the total is not reached, and how material prices and revision changes are handled during the term.
What is a framework agreement often confused with?
A call-off resembles a repeat order, but a repeat order follows a new request for a part you made before, a call-off is an order under a running agreement. And where a quantity break shows prices at different quantities on one quote, a framework agreement fixes a price for a period.
Frequently asked questions
Do I price each call-off separately or the whole contract?
Price the contract, based on how you will actually produce. If you make each call-off separately, setup per call-off belongs in the piece price. Spread programming over the committed total; spreading it over a forecast is a risk.
What if the customer calls off fewer than agreed?
Then one-off costs are spread over fewer pieces than estimated, and there may be stock left. That is why a framework agreement needs terms on a minimum quantity, a retrospective settlement or the customer taking over stock made for it.
Can the price change during a framework agreement?
Only where the contract allows it, for example through a price adjustment clause for material or a review after a revision change. Without such terms you are in principle bound to the price for the term of the agreement.