How it's calculated
Total contract value (TCV) is everything a customer has signed up to pay. Annual contract value (ACV) turns that into a yearly figure that can be compared across contracts of different lengths. One-time fees, such as setup or implementation, are taken out first because they do not recur. Public software companies use similar distinctions when they report recurring revenue: Freshworks, for example, counts the subscription revenue it "would contractually expect to recognize over the next 12 months".SEC (EDGAR)
The formula
- Recurring value = TCV − one-time fees
- Per month = recurring value ÷ contract months
- ACV = per month × 12
- First-year bookings = per month × min(12, contract months) + one-time fees
Worked example
A three-year contract with a TCV of 330,000 that includes 30,000 of setup fees has 300,000 of recurring value and an ACV of $100,000. First-year bookings, including the setup fee, are $130,000.
| Line | Amount |
|---|---|
| Total contract value (TCV) | $330,000 |
| One-time fees (setup, implementation) | -$30,000 |
| Recurring value | $300,000 |
| Per month (÷ 36) | $8,333 |
| ACV (per month × 12) | $100,000 |
| First-year bookings (incl. one-time fees) | $130,000 |
Assumptions and limitations
- Even spread. Ramped prices or discounts that change by year make the first year differ from the average ACV.
- Definitions vary. Some teams include one-time fees in first-year ACV; agree one definition for targets and commissions.
- Committed value only. Usage that is not contracted is not part of TCV.