Contracts shape how businesses work together. They make sure both sides know what to expect and what they owe each other. In my experience, a contract is more than just a formality, it’s a written promise that backs up trust between people or companies. For service-based businesses, like those that use digital tools or software, having a strong contract isn’t just helpful; it’s wise. Every agreement needs to be clear, so everyone’s rights are protected and surprises stay rare. If you want to understand contracts at a deeper level, contracts explained: types, elements and lifecycle overview is worth a look.
What contract value means and why it matters
When I explain contract value, I always remind people it’s not just the price you see in a proposal. Contract value is the total amount the business expects to make from fulfilling a contract, including every cost and fee written into that agreement. This covers:
- Base price (the main service or product fee),
- Upfront costs (setup or onboarding fees),
- Ongoing or recurring costs (like monthly subscriptions, support, or renewals),
- Any extra charges, penalties, discounts, or incentives.
This is especially key in SaaS and managed IT industries, where ongoing service is the heart of the deal. For example, when I set up a contract for a cloud solution, it isn’t just one payment, it’s a mix of a starting fee plus regular monthly or annual costs. If you ignore any of those, you lose sight of the real worth of your agreement.
How to break down contract value: base, upfront, and ongoing
I’ve seen many businesses focus only on the “headline” price, but this is just the starting point. Here’s how I break down contract value:
- Base contract value: The main fee paid for the core service or product. In a SaaS deal, that’s your standard monthly subscription rate.
- Upfront costs: Anything charged at the start, such as a setup, implementation, or training fee. For example, onboarding new users might have a one-time charge of £200.
- Ongoing/recurring costs: Regular fees like monthly subscriptions, periodic add-ons, or renewal charges. If your subscription is £100 a month for a year, that's £1,200.
Total contract value (TCV) adds up every charge across the full contract period, no surprises, no confusion.
For businesses with complex contracts, knowing the TCV supports better revenue forecasts and helps compare different agreements, even if they run for different terms or use mixed pricing models. This is an idea I see making a difference for all sorts of organizations, from small shops to global tech firms.
Comparing contract value, price, and lifetime value
It’s common to mix up contract price and contract value, but they’re not the same. Contract price is the basic cost in the agreement, not including setup, support, penalties, or discounts. Contract value counts everything, fees, incentives and even penalties.
Another concept I get asked about a lot is customer lifetime value (CLV). TCV and CLV sound alike but have distinct meanings:
- TCV is the total value of a single contract, fixed in the contract itself.
- CLV tries to guess how much revenue you’ll get from a customer across renewals, expansions or add-on services. It’s a projection, not a guarantee.
TCV is certain. CLV is an estimate.
This difference matters when you measure true profitability. If you only focus on the initial contract price, you could miss hidden costs or extra revenue streams. Tracking TCV gives you a complete picture for profits, commissions, or long-term planning.
How contract value shapes revenue forecasts and business strategy
Understanding contract value gives insight for managers, sales teams, and accountants. Here’s how I’ve seen it help in practice:
- Revenue forecasting: You can better predict future earnings across the business by summing upcoming contract values.
- Resource planning: Knowing the total deal size helps with staffing, inventory, and budgeting.
- Client segmentation: TCV shows you which clients or contracts matter most for growth.
- Incentive planning: Sales teams often tie bonuses to TCV, not just the base price.
In government, public procurement and defence, contract value is especially well documented. For example, UK defence contracts with a total value of £16.7 billion saw a shift to £15.6 billion at completion due to cost efficiencies. Knowing contract value in advance protects against budget shocks and helps manage performance every year. Similar figures in public procurement show average awards of about £95,000, but 13% of contracts are £1 million or more (public-sector contract statistics).
B2B SaaS use case: small vs large contracts, with real sums
Here’s a situation I see often: a SaaS company signs two types of customer contracts.
- Small business deal: £100/month for 12 months plus a £200 setup fee. TCV = (£100 x 12) + £200 = £1,400
- Large business deal: £500/month for 12 months plus a £1,000 setup fee. TCV = (£500 x 12) + £1,000 = £7,000
If you raise the setup fee by £100, every contract TCV jumps right away. Change the contract length to 24 months, and the TCV doubles, cost and recurring value both increase. Every pricing decision flows through to your forecasts and bottom line.
I find these numbers easy to explain to sales, finance, or even clients, they show the whole relationship, not just what’s paid up front.
How other industries think about contract value
Different sectors use TCV in their own way. In my research:
- Construction: Deals can span years, with a base price, stages, and many change orders. Some projects, especially in the public sector, run into the billions (quarterly defence contract data).
- IT and managed services: Firms manage fixed fees plus subscriptions, but contracts are getting shorter, statista data found three-year averages in 2020 (managed‑services contract market figures).
- Government/public sector: Contracts may have “cost-plus” or “fixed-price” elements, and compliance costs are often built in from the start.
Knowing how TCV is structured in your industry helps you compare bids, manage risk, and plan your pipeline using facts, not guesses.
The value of digital contract tools for TCV
If you want to streamline contracts, tools like PandaDoc offer templates, e-signatures, and analytics so you stay organized. However, after years in this market, I always recommend platforms like CloudSign.ie for businesses needing true control over the full contract cycle. Unlike many competitors, CloudSign.ie adds AI-powered insights and native integrations, for example, with CRM or cloud storage, that let you catch risks or spot upsell chances early.You can see the impact of AI by reviewing how contract management software shapes modern business and how lifecycle management tools deliver results.
One reminder: while digital systems save time, genuine expertise is needed to draft and review contracts. Digital document tools do not replace legal services, always consult professionals for complex or high-stakes agreements. If you want practical advice, see this simple guide to business contract writing.
What’s next?
Total contract value could reshape how you forecast, budget, and track clients. It helps you find not just the biggest deals, but the best ones. If you want to work smarter, check out key contract metrics or get started today with CloudSign.ie’s free plan for e-signing, automation, and risk detection. Bring clarity and speed to your documents, with every signature, you’ll know exactly what’s at stake.
Frequently asked questions
What is total contract value (TCV)?
Total contract value is the full sum a business expects to earn from a contract, including all base, upfront, and recurring charges, plus any extras or discounts, for the agreement’s complete duration. It is fixed when you sign, a number you can rely on for planning and tracking.
How to calculate contract value?
Add the base price (monthly payments x contract length), any upfront fees, and all ongoing or periodic charges. For example, a 12‑month contract at £200/month with a £300 setup fee is (£200 x 12) + £300 = £2,700.
Why is TCV important for businesses?
Knowing your TCV helps you forecast revenue, identify high-value clients, structure sales incentives, and make better decisions about hiring or resourcing. It also supports apples-to-apples comparisons between deals with different contract terms.
How does contract value affect revenue?
TCV lets you predict future cash flow, manage expectations, and ensures your pipeline reflects not just how many contracts you’ve sold but their true financial worth. You can avoid nasty surprises by tracking the full value, not just the starting price.
What factors influence contract pricing?
Many things can change contract pricing: contract length, complexity of services, add-on options, penalties, built-in discounts, compliance costs, and any special conditions. Always check the full breakdown before signing so you know exactly what you’re committing to.