Frame agreement
Sector Deep DivesAn agreement fixing prices, specifications and terms with a customer without committing that customer to any volume.
Also written: framework agreement, frame contract, call off agreement
A frame agreement is how large industrial buyers across Europe contract for repeat supply. It settles the commercial terms once so that individual purchases, the call offs, can be placed quickly against it. What it does not do is oblige the customer to buy anything.
That distinction is the whole reason the term matters in a valuation conversation. A frame agreement is a strong commercial position and a poor revenue commitment. Whether any part of it counts inside reported backlog is the company's own disclosure policy, since IFRS does not standardise what a backlog figure contains, so two companies reporting identical backlog can be holding quite different things.
The questions that resolve it are specific. What exactly is included in the reported figure, are options and letters of intent counted, what cancellation rights does the customer hold, and does cancellation carry a termination payment that recovers work in progress and committed materials. A backlog that can be cancelled without compensation is a forecast wearing a contract's clothing.
None of this makes frame agreements a negative. They usually indicate an incumbent supplier relationship and they lower the cost of winning each subsequent order. They just belong in a different column from firm orders when you are converting an order book into revenue.
Worked example
A supplier announces a frame agreement covering three years of components for a European vehicle manufacturer, and the release quotes a headline value.
If the customer has committed to no minimum volume, that headline is a ceiling rather than a contract. Revenue arrives only as call offs are placed.
A firm order of a tenth the size, with a cancellation fee covering work in progress, is worth more as contracted revenue than the announcement is.