What it means
The opposite of a firm quote is an indicative or subject quote, sometimes called a level. An indication tells you roughly where a price sits and commits the quoting party to nothing, which is fine for planning and useless for execution.
Confusing the two is how buyers end up building budgets on numbers that evaporate at the point of order. Three elements make a quote firm: the price, the size or quantity it applies to, and how long it stands.
A dealer quoting a bond at a given bid and offer is firm only in the size shown, so a fund wanting ten times that amount is negotiating a fresh price rather than accepting the one on the screen. In securities markets a two-way firm quote shows both a bid, the price at which the dealer will buy, and an ask or offer, the price at which it will sell.
The gap between them is the spread, which is the dealer's compensation for standing ready to trade and for the risk of holding inventory in a moving market. In procurement the same idea appears as quotation validity.
A construction subcontractor quoting a fixed price for 30 days is carrying the risk of steel and labour costs moving inside that window, which is why long validity periods attract a higher number or an escalation clause tied to a published index. Firmness has limits worth understanding.
Electronic markets often allow a brief last look before a quote is honoured, and commercial quotes are usually firm only if accepted exactly as issued, so a buyer who changes the specification or the delivery date has released the supplier from the original price.
In practice
Real-world examples.
Example
A treasurer needing to buy euros for a supplier payment asks two banks for firm quotes in a specified amount, valid for 30 seconds. She takes the better of the two, and the trade is done at the quoted rate rather than at whatever the market has moved to by settlement.
Example
A main contractor collects firm quotes from three electrical subcontractors, each valid for 45 days, before submitting a fixed-price tender. Because the subcontract prices are firm for longer than the tender assessment period, the contractor is not exposed to a supplier repricing after it has won the job.
Example
A small manufacturer asks a steel stockholder for a firm quote on 20 tonnes and is offered a price valid for seven days, or an indicative level for delivery in three months. It fixes the seven-day price for immediate need and keeps the longer horizon as a forecast rather than a budget line.
Formula
Calculation
Spread = ask price - bid price
Mid price = (bid price + ask price) / 2
Spread as a percentage = (spread / mid price) x 100
A dealer shows a firm two-way quote in a corporate bond of $42.10 bid and $42.30 ask, in 5,000 units either way. The spread is $42.30 - $42.10 = $0.20, and the mid price is ($42.10 + $42.30) / 2 = $42.20. As a percentage of the mid that is ($0.20 / $42.20) x 100 = 0.47%.
A buyer who accepts the ask pays 5,000 x $42.30 = $211,500. Measured against the mid price, the immediate cost of crossing the spread is 5,000 x $0.10 = $500, since the buyer pays $0.10 above mid and would receive $0.10 below mid if it sold straight back. A fund wanting 50,000 units cannot simply multiply, because the quote was firm only in 5,000 and the dealer will widen the price for the larger size.Case study
Seen in the real world.
Merrow Fabrication is a fictional metalwork business used here as an illustrative example. For years it quoted customers from a price list built on indicative supplier levels, and in a rising steel market it repeatedly won work at prices that no longer covered the material cost by the time the order arrived.
The turnaround was procedural rather than clever. Merrow began requiring a firm supplier quote, in the exact tonnage and grade and valid for at least the life of its own customer quotation, before any job over $25,000 was priced. Where a supplier would only offer an indication, Merrow either shortened its own quotation validity to seven days or added an escalation clause tied to a published metals index.
The immediate effect was a handful of lost tenders against competitors still quoting optimistically. The lasting effect was that the jobs Merrow did win delivered the margin the estimate promised, and its finance director could finally rely on the gross margin in the quotation software when forecasting cash.
Watch out
Common mistakes.
- Treating an indicative level as a price you can transact on. An indication is a guide with no obligation behind it, and the difference usually shows up at the worst possible moment.
- Ignoring the size a quote is firm in. A dealer quote holds only for the quantity shown, and a much larger order will be filled at a worse average price.
- Letting a customer quotation stay valid longer than the supplier quotes behind it. That gap is an unhedged position on input costs, taken on without anyone deciding to take it.
Questions
People also ask.
How long does a firm quote last?
Anything from a few seconds in currency markets to 30 or 60 days in construction, and the validity period should always be stated on the face of the quote.
Can a supplier withdraw a firm quote?
Not once it has been accepted on its stated terms, though it can withdraw before acceptance or if the buyer changes the specification, quantity or delivery date.
Is a firm quote the same as a firm order?
No, a quote is the seller's binding offer, and it becomes a firm order only when the buyer accepts it within the validity period.
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