Pricing and Cost Allocations

Pricing and Cost Allocations

Determining fair, auditable charges is the most sensitive aspect of TSA negotiation. Pricing must recover the parent’s incremental costs, remain transparent to the carve-out, and avoid regulatory scrutiny for transfer-pricing abuse.

Guiding Principles

  • Cost Transparency — Base calculations on traceable general-ledger accounts or time-tracking data.
  • Incrementality — Charge only incremental and directly attributable costs; overhead should be minimal and well-justified.
  • Neutrality — Parent should neither profit nor subsidise; rates approximate third-party market levels.
  • True-Up Discipline — Monthly or quarterly reconciliations adjust for volume variances; credits or debits issued promptly.
  • Documentation — Maintain workpapers that tie back to audited financials for tax and audit defence.

Common Pricing Models

  • Cost-Plus
    • Parent recovers actual direct costs plus an agreed mark-up (typically 5 – 10 %) to cover overhead.
    • Best for labour-intensive or bespoke services such as finance close support.
  • Unit-Rate
    • Flat price per transaction, user, or device (e.g., $X per payslip, $Y per help-desk ticket).
    • Encourages efficiency and simplifies volume true-ups.
  • Fixed-Fee
    • Single monthly charge regardless of usage (suitable for predictable, low-variance services like board governance support).
    • Requires clear definition of scope to avoid “all-you-can-eat” cost creep.
  • Hybrid
    • Base fee covering core capacity plus variable fee for excess volumes (useful for IT hosting or network bandwidth).

Cost-Allocation Methodology (Cost-Plus Example)

  • Identify Direct Cost Pools
    – Labour hours logged to dedicated cost codes.
    – Third-party invoices (software licences, cloud instances).
    – Allocated share of consumables (printing, telco minutes).
  • Apply Allocation Drivers
    – Headcount, tickets, CPU hours, or data-storage gigabytes—whichever best reflects consumption.
  • Add Overhead Mark-Up
    – Cover finance, HR, and facilities burden associated with service delivery; disclose calculation.
  • Calculate Unit Costs
    – Divide total cost by forecast volume to derive provisional monthly charge.
  • True-Up Process
    – Compare actual vs. forecast volume; adjust next invoice.
    – Retain audit workbook with source invoices, time sheets, and driver metrics.

Pricing Governance

  • Rate-Card Approval — CFO of parent and carve-out sign off before Day 1.
  • Invoice Validation — Carve-out TSA Lead reviews cost drivers and volumes within five business days of receipt.
  • Dispute Resolution — Escalate unresolved billing issues to TSA PMO; final arbitration by Steering Committee.
  • Annual Re-Rate (if term > 12 months) — Adjust for wage inflation, vendor price changes, or scope reduction.

Deliverables

  • Cost-allocation workbook linking each TSA service to GL accounts and drivers.
  • Rate-card document with unit rates, mark-up percentages, and assumed volumes.
  • Monthly invoice template showing cost components and true-up line.
  • Audit trail binder for tax authorities and external auditors.

Common Pitfalls

  • Charging fully-loaded corporate overhead, inflating TSA fees and sparking disputes.
  • Using outdated volume forecasts, leading to large retroactive adjustments.
  • Failing to segregate one-time setup costs from recurring service fees.
  • Omitting tax-gross-up clauses—buyer surprised by VAT or sales-tax additions.

Transparent, well-governed pricing builds trust, streamlines invoice approval, and withstands audit or regulatory review—ensuring TSAs fulfil their purpose without becoming a lingering financial burden.

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