Framework agreement

What it means

A framework agreement is a long-term contract setting the general terms of cooperation between two parties, such as prices, payment terms, delivery times, liability and complaints. Individual deliveries are then made through simple purchase orders or call-off contracts that refer to it.

A framework agreement suits repeated supplies of goods or services. The parties do not have to renegotiate all the terms with every order. In substance it may be a purchase agreement, a contract for work or a services agreement.

For services, a framework agreement often includes a service level agreement setting availability, response times and penalties for missing them. Public procurement uses a similar instrument called a framework agreement too.

How it works in practice

When drafting framework agreements with clients we focus on what is hard to agree order by order: the pricing mechanism and how it changes over time, invoice payment terms, contractual penalties, liability caps and how the agreement ends. Delivery details are left to the orders.

It is important to set an order of precedence for conflicts. Usually the framework agreement prevails over general terms and conditions, and an order may deviate from it only expressly. Without such a rule, conflicting documents lead to disputes.

For accounting purposes a framework agreement by itself creates neither revenue nor a liability; those arise only with individual deliveries. With volume discounts based on annual purchases, however, we check whether an accrual for a retrospective discount is needed.

What to watch out for

A framework agreement with automatic renewal and a long notice period can bind a company for longer than intended. Before signing we recommend checking how it can be terminated and whether it commits the company to a minimum purchase volume.

If practice differs from the contract for a long time, for example invoices are issued with different payment terms, this may be treated as a change to the contract by conduct. We therefore recommend recording changes in an amendment rather than merely tolerating them.