Volume Commitment Agreement

Outsourcing service providers have their reasons for asking customers to engage in a certain level of activity, some more reasonable than others. Minimum commitments can enable suppliers to recoup ex ante investments, better plan personnel decisions and ensure a certain level of revenue or profits. For larger or smaller, well-established and stable companies, contracts with volume commitment clauses can be beneficial. In exchange for these commitments, you often get a lower interest rate. However, if you even have an idea that you may not be filling your monthly or annual volume, these lower costs may disappear. So don`t play on a contract with volume commitments if your business is new or if you have fierce competition that will give you a rush for your money. Despite pressure from suppliers, some outsourcing customers have managed to push back minimum amounts obligations, Tanowitz says. You`ll find other ways to meet the king needs of an outsourcing provider: capital is one of the most important factors related to the evaluation of such scenarios. The following graph shows two different scenarios of capital expenditure over a period of about three years. The Orange or “Scenario 1” scenario represents capital expenditures in advance in the current year, while the blue line “Scenario 2” divides capital over several years.

In order to assess the most relevant scenario in a situation with minimal volume commitments, we need to consider some of the additional factors mentioned above, such as production, commitment volume and pricing. When commodity prices are high, producers can turn on these agreements with a sigh of relief. They have “reserved” space on the pipeline and do not have to pay high inruptible rates for capacity. However, as required by the laws of supply and demand, if prices begin to fall due to an increase in the quantity delivered to the market, producers will in turn resume drilling and finishing to obtain capital for a more favourable economic environment. This general change in economic activity will reduce expected output in the short term and put firms at risk of not meeting the minimum requirements they have agreed. Decisions on the conclusion of these agreements and the management of production under these agreements will result in a large number of management issues: not as bad as the monthly option, but minimum durations (i.e. the duration of the deal) make it possible to fill the deficits over time. However, many of today`s outsourcing agreements require less significant pre-investment from the supplier, such as application development and maintenance contracts or newer light infrastructure agreements.

Customers who contribute more to flexibility feel that there is not much to be desired in minimum obligations. As the name suggests, minimum quantity obligations are agreements between upstream producers and another party, such as a mid-sized company.