Contracts play a big role in business; they lock in agreements and help keep things running smoothly as companies grow.
In this article, we look at the importance of contract value, a key concept that matters to everyone involved in a deal.
We’ll break down what a contract actually is, why its value matters, and how to figure out what that value looks like in real terms.
Key takeaways:
- The value of a contract equates to the amount that will be earned once it has been fully executed.
- It encompasses all costs in the agreement—upfront and ongoing.
- This is particularly important in agreements where a service is being provided over a period of time.
- Calculating a total contract value (TCV) is crucial in business.
What is a contract?
To begin, it’s essential to establish why contracts are important.
A contract is a legally binding agreement between two or more parties. It establishes the rights, obligations, and expectations of the parties involved.
In doing so, it specifies the terms and conditions under which the parties will engage.
Not least, that includes payment terms (e.g., how much needs to be paid and when).
Whenever there’s an agreement to work with or for a third party, it’s advisable for businesses to formalize the arrangement with a written contract.
Doing so clarifies the terms of engagement, minimizes ambiguity, and provides suitable legal protection.
Good contracts strengthen agreements and help prevent conflict and disputes further down the road.
The security a contract profers is particularly essential for businesses that offer a service.
For example, in an agreement to provide software as a service (SaaS), parties need clarity regarding upfront and ongoing costs and other terms such as subscription length.
In short, knowing how to create a contract and efficiently manage it is an integral part of running a robust business.
What does contract value mean?
Contract value refers to the total monetary worth of a contract from beginning to completion.
It’s a specific metric for the amount that will be earned from the contract once it’s been “fully executed,” e.g., after all the obligations in the agreement are satisfied.
It encompasses all the costs in the agreement, including upfront and ongoing committed costs.
Base contract value, upfront costs, and ongoing costs
When you’re assessing contract value, understanding what the base contract value is compared to the additional expenses built into the agreement is important.
The base contract value is the core price of any products or services being delivered. This is the agreed-upon foundation amount before any extras are added.
Then you have upfront costs, like implementation, onboarding, setup fees, or initial deposits, and ongoing costs, like subscriptions, maintenance, support fees, or renewals. These additional costs expand the total value of the contract.
When you account for all three (base, upfront, and ongoing costs), you’ll better understand the true financial impact of a contract.
Total contract value (TCV) explained
The total contract value (TCV) is the full financial value of a contract over its entire lifecycle. As explained above, this would include the base contract value, upfront costs, and ongoing costs like recurring or usage-based charges.
TCV gives you a sense of the entire monetary impact of the agreement. This helps you better forecast long-term revenue or assess customer lifetime value. It also helps when comparing opportunities with different structures or durations.
Contract value vs. contract price
While these are sometimes used interchangeably, they are two different things. Contract price is the amount a customer pays for the core product or service, i.e. the fixed price outlined in the agreement.
Contract value includes the contract price plus any additional fees, recurring charges, discounts, incentives, and adjustments that would affect the total financial outcome.
Essentially, the contract price is the base cost of a deal, whereas the contract value shows the entire financial scope of the deal.
Contract value vs. lifetime value
As discussed, contract value is the total financial worth of a single contract. Customer lifetime value (CLV), on the other hand, is the total revenue a customer might generate across their whole relationship with your business. This could include renewals, upsells, cross-sells, and future contracts.
Contract value helps assess the profitability of an individual agreement, and CLV provides a clearer view of a customer’s long-term impact.
The importance of understanding the value of a contract
“Value of contract” is a crucial metric for businesses to monitor.
For a start, it allows companies to track how much revenue each customer generates.
It also facilitates accurate forecasting of income accruing from all such agreements collectively over time.
As such, businesses should utilize this metric in their strategic decision-making.
It’s particularly salient in situations where contracts cover an ongoing service provision — for example, software as a service (SaaS).
Let’s consider an example. Imagine a B2B software company has secured a new customer. A contract is agreed to specify:
- Any upfront costs for the customer to pay (e.g., for training, professional support, or hardware purchases)
- Any ongoing subscription fees (e.g., a monthly cost)
- The contract length (e.g., a year)
In this context, the “value of the contract” would be the total amount the customer pays the business for the service across the agreed period.
This includes both upfront and ongoing fees across the contract lifespan.
Of course, the customer may subsequently choose to retain the service.
In this case, a new contract will generally be prepared for renewal with its own additional contract value for the business.
But that future potential revenue is not, of course, part of this particular total contract value (TCV).
Knowing the TCV of a contract allows a business to assess the return on investment for each customer based on accurate real-life data.
For example, they could calculate the return on investment to secure the sale (e.g., the cost of product development, sales, and marketing).
This can inform future strategic planning.
Accurate knowledge of TCVs is essential for forecasting future revenue for the business.
You may also have heard of “customer lifetime value” (LTV).
Remember, however, that this is not the same as TCV. Instead, it’s an additional useful metric for businesses to consider.
It predicts the total amount a customer is likely to spend on your product or service across the lifetime of their relationship with you.
Ergo, it’s more of a longer-term projection.
Where TCV only captures the value of the existing contract with the customer, LTV takes a broader view. Is the customer a newcomer or a renewal? How likely are they to renew on a year-by-year basis?
A business’s LTV predictions are only as good as the modeling that underpins them.
Where TCV is a firm, contractually agreed figure, LTV is not. It’s a prediction based on your understanding of the market and customer behavior.
Existing TCV figures can play an essential role in predicting LTV, but this must also be informed by solid modeling of churn and retention.
With this difference understood, let’s get back to total contract value (TCV).
How is total contract value (TCV) calculated?
The total contract value (TCV) involves calculating the total amount payable to the business, according to the contract, across the agreement’s lifespan.
There’s a simple formula for this:
There are three variables to consider:
- Monthly recurring revenue (MRR). How much will the customer pay on a monthly basis for the service?
- Contract term length. How long has the customer agreed to pay for the service? How many months have they committed to paying for?
- One-off fees. This may be to cover initial set-up costs, training, hardware, or further professional services.
The best way to illustrate the TCV formula is with an example.
Imagine Company A provides a SaaS product to other businesses. They offer two pricing plans.
- Plan 1 is aimed at small enterprises and costs £100 per month for a one-year contract length, plus an additional £200 in one-off fees.
- Plan 2 is aimed at larger enterprises and costs £500 per month for a one-year contract period, plus an additional £1,000 in one-off fees.
What’s the total contract value (TCV) of each of these plans? Just plug the numbers into the formula to find out.
- Plan 1 TCV = (£100 x 12) + £200 = £1,400
- Plan 2 TCV = (£500 x 12) + £1,000 = £7,000
As you would expect, the TCV of Plan 2 is much higher than that of Plan 1.
Businesses can then model the impact of seemingly small changes using this metric.
For example, what would happen if your team agrees to a cheaper MMR of £410 for Plan 2?
That discount would reduce the TCV to £5,920, causing a significant reduction in business profits!
Understanding total contract value can help you focus your strategy and sharpen your tactics.
For example, while discounts can seem tempting to get deals over the finish line, awareness of TCV shows your team the potential long-term impact of such decisions.
Contract value across industries
Because contract value can vary across different industries because of the differences in project scale, duration, pricing models, etc., let’s look at a few examples:
- Construction: Contracts for this industry can involve large, multi-phase projects that have a lot of upfront costs for materials and labor. It also involves ongoing costs for things like project management and compliance. The total contract value in construction can actually span millions of dollars, and it’s heavily dependent on project timelines.
- IT and Software: In software, contracts can include things like one-time implementation fees, subscription or licensing fees, and costs for ongoing support or maintenance. The total contract value can help predict the long-term revenue of a client.
- Government: Government contracts can have strict regulatory and reporting requirements, and they can be both fixed-price and cost-reimbursable in structure. The contract value can include base costs and optional extensions/modifications, which means it’s critical to track the costs accurately.
Ensure a flawless contract creation process with PandaDoc
Getting great contracts in place isn’t always easy.
Drafting an agreement requires a certain degree of expertise, e.g., knowing what makes a contract valid.
PandaDoc is a comprehensive document creation platform that simplifies the entire contract lifecycle.
We offer a range of features designed to enhance efficiency, ensure accuracy, and improve collaboration during contract creation and negotiation.
If you’re wondering what to include in a contract, PandaDoc has you covered.
We provide a library of professionally designed, customizable contract templates and offer electronic signature functionality.
Plus, our powerful tracking and analytics features offer support throughout the entire contract management process.
PandaDoc’s document value feature also allows you to see or adjust the total value of your document.
Our software can simplify contact management for your business and shorten its sales cycles by providing robust support through extensive features and capabilities that facilitate accuracy, efficiency, and collaboration.
Try PandaDoc free for 14 days.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDocs services are governed by our Terms of Use and Privacy Policy.
Originally published July 27, 2023, updated November 24, 2025
Frequently asked questions
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Total contract value (TCV) is the total financial worth of a contract over its full term. This includes one-time fees, recurring charges, and other ongoing payments.
Annual contract value (ACV) is the average revenue that a single contract generates over a 12-month term.
Learn more about ACV in this guide to ACV in sales.
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TCV refers to the full value of a contract. Annual recurring revenue (ARR) refers to the predictable, recurring revenue that’s expected in a single year. This value does not include one-time fees or variable charges, as ARR is a narrower measure than TCV.
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Total contract value can be impacted by factors like the length of the contract, one-time fees (think setup or onboarding costs), recurring subscription or support charges, contract changes, and usage-based or variable costs.
If any of these elements change, the TCV can increase or decrease.
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When you understand contract value, you can improve revenue forecasting, resource planning, and sales strategy. It helps your teams predict long-term case flow and help you navigate investment and staffing decisions. It also helps you understand the true profitability and financial impact of individual deals beyond the contract price, which is valuable when you’re looking at the bigger picture.
