Pricing and Cost Allocations

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.