Long term agreement

A long term agreement commits both sides for a period, typically 3 to 6 years, and it converts a quote from a price for an order into a price for a programme. What it fixes and what it leaves open is where the value sits.

Price is usually fixed with a scheduled annual reduction, which means the quote has to be built with that curve in mind rather than discovered in year 2. A supplier quoting a flat cost against an agreement that steps down 3 percent a year has committed to a margin that shrinks whether costs fall or not.

Volume is the half that is usually softer than it looks. Most agreements state an estimated annual usage rather than a firm commitment, so the tooling amortisation and the working capital both rest on a figure the customer is not obliged to deliver.

The clauses worth negotiating are the ones nobody reads at signature. A material index, a minimum volume for tooling recovery, a cancellation settlement, and what happens if a revision changes the part. Each of those is easier to agree before the award than after it.