Price the reverse TSA to recover real cost. Margin follows.

Cost plus pricing. The default for most reverse TSAs.

Cost plus is the dominant pricing model for reverse TSAs because it aligns the buyer's recovery with the buyer's actual cost. The buyer documents direct cost each month, applies an agreed mark up, and invoices the total. The mark up covers indirect overhead, governance burden, and operational margin. Direct cost typically includes labor (loaded for benefits and payroll tax), materials, infrastructure attributable to the service, and any other directly attributable cost. The buyer side advisor sets the cost categories explicitly in the catalog so the seller cannot challenge category definitions during true ups.

Mark up levels vary by service complexity. Routine services delivered by junior or operational staff typically support a mark up of 5 to 10 percent. Specialist services that require senior or licensed personnel typically support 10 to 20 percent. Services that require dedicated resource allocation, scarce technical expertise, or strategic management attention can support 20 to 25 percent or higher. The buyer side advisor benchmarks the mark up against the operational profile of each service and resists seller pressure to set a single low mark up across the catalog.

Cost plus contracts need clear cost documentation rules. The reverse TSA should specify what evidence the buyer must provide each month, what audit rights the seller has, and how disputes over cost categorization get resolved. Without those rules, every invoice becomes a potential dispute and the operational burden of billing grows beyond the value of the contract.

Cost plus pricing is the model used in most reverse TSAs because it adapts to variable demand and protects the buyer from absorbing cost increases. The model trades off variance protection for billing complexity. The buyer side advisor calibrates the documentation discipline so the model produces predictable monthly invoices without disputes. The work pairs with the reverse TSA primer.

Fixed fee pricing. Simple, but it shifts the variance risk to the buyer.

Fixed fee pricing sets a monthly amount the seller pays regardless of actual cost or volume. The model is simple to bill and simple to budget. It works well for short duration reverse TSAs with predictable demand and stable operational cost. The buyer recovers cost on average across the duration even if individual months run higher or lower than expected.

Fixed fee shifts variance risk to the buyer. If actual demand or cost runs above the level assumed when the fee was set, the buyer absorbs the difference. The model is appropriate where the buyer is confident in the cost forecast, can absorb modest variance, and values the operational simplicity of a flat monthly invoice. The model is inappropriate where demand is uncertain, where third party costs are volatile, or where the duration is long enough that input costs may change materially.

A workable fixed fee structure includes a recalibration mechanism. The reverse TSA should specify that the fee is reviewed quarterly (or at agreed thresholds) and adjusted if actual cost diverges from the original assumption by more than a defined percentage (typically 10 to 15 percent). The recalibration mechanism gives the buyer protection against variance without converting the contract into a cost plus model with every invoice.

Fixed fee pricing also benefits from a volume cap. The fee assumes a defined level of demand. Above the cap, the seller pays incremental charges on a tiered basis. The cap protects the buyer from open ended demand under a flat fee structure. The buyer side advisor sets the cap based on the operational capacity allocated to the service, not on the seller's optimistic demand forecast.

Pass through pricing. Third party costs flow at cost.

Pass through pricing applies to costs the buyer incurs from third parties on the seller's behalf. Vendor license fees, infrastructure costs, cloud charges, telecom costs, and any other third party cost directly attributable to the seller's use of the service should pass through at the actual cost the buyer pays the vendor. The buyer should not absorb third party cost. The buyer should also not mark up third party cost beyond a reasonable administration charge.

Pass through structures need documentation. The reverse TSA should specify what third party costs are passed through, what evidence the buyer must provide (typically vendor invoices), what allocation methodology applies where the cost serves both the buyer and the seller, and what audit rights the seller has. Without documented allocation rules, shared third party costs become a recurring dispute.

A small administration charge on pass through cost (typically 2 to 5 percent) is reasonable. The charge covers the buyer's burden of vendor management, invoice processing, and dispute handling on the seller's behalf. The buyer side advisor builds the administration charge into the contract explicitly so the seller cannot challenge it as a hidden mark up during quarterly true ups.

Pass through pricing pairs naturally with cost plus pricing on direct cost. The combined model bills direct cost plus mark up plus third party cost plus administration charge. The buyer recovers the full operational cost. The seller pays only for what the buyer actually delivers. The work pairs with the pass through pricing framework from the standard TSA work, with the roles reversed.

Hybrid models. The realistic answer for most catalogs.

Most reverse TSA catalogs use a hybrid pricing model. Routine high volume services use fixed fee for simplicity. Specialist services use cost plus to capture variance. Third party costs pass through at cost with administration charge. The hybrid model matches the pricing mechanism to the economic profile of each service rather than forcing every service into a single model.

A typical hybrid catalog might price IT operations support as a flat monthly fee, payroll processing as cost plus on direct hours, cloud infrastructure as pass through at vendor cost plus 3 percent administration, and ad hoc executive support as cost plus on senior labor with a 20 percent mark up. The buyer recovers cost on the volatile categories and operational simplicity on the stable ones.

The pricing model decision for each service follows three questions. First, is demand predictable enough that a fixed fee will recover cost on average? Second, is the service complex enough that variance protection through cost plus is worth the billing burden? Third, is the cost driver largely third party such that pass through is the cleanest mechanism? The buyer side advisor walks through each service in the catalog and assigns the appropriate model before signing.

Hybrid models need a single combined invoice each month. The seller should not receive four invoices on four cycles. The buyer's finance function consolidates the fixed fee, cost plus, pass through, and administration charges into a single monthly invoice with line item detail. Consolidated billing reduces dispute friction and gives the seller a clear view of total cost. The work pairs with reverse TSA service catalog design.

Mark up benchmarks. What the buyer can defend.

Sellers consistently push for low mark ups in reverse TSAs, often citing the standard TSA mark up levels the buyer accepted in the other direction. The argument confuses the operational reality. A standard TSA is a continuation of the seller's existing internal cost base. A reverse TSA is the imposition of a new external workload on the buyer's operational team. The mark up needs to compensate the buyer for taking on capacity that was not in Newco's operating plan.

The defensible mark up range for cost plus reverse TSA services typically sits in three bands. Routine operational services (high volume, low complexity, no senior involvement) defend a mark up of 5 to 10 percent. Standard services (moderate volume, moderate complexity, some senior involvement) defend 10 to 20 percent. Specialist or scarce services (low volume, high complexity, significant senior involvement, scarce skills) defend 20 to 25 percent or higher.

The defense for higher mark up rests on three factors. First, the operational disruption cost: the buyer's team is delivering work that crowds out Newco's own initiatives. Second, the relationship friction cost: the buyer is managing an external counterparty without the alignment of an internal department. Third, the exit risk cost: the buyer carries the cost of standing up and standing down the function across the duration of the reverse TSA. The buyer side advisor surfaces these factors during pre signing pricing discussions so the mark up is grounded in operational economics rather than the seller's reference points.

Mark up should escalate over the duration. Months 1 to 6 typically run at the base mark up. Months 7 to 12 step up modestly to reflect ongoing capacity drain. Beyond month 12 the mark up rises significantly as the buyer's tolerance for continued seller dependence drops. The escalation creates a price signal that encourages the seller to complete its own transition on schedule. The work pairs with reverse TSA extension fees.

Set the model before signing. Mid contract changes rarely close.

The pricing model is most negotiable before signing. Once the reverse TSA is signed and the operational rhythm starts, changing the model is hard. The seller has settled into a billing cadence. The buyer's finance function has built the operational discipline around the chosen model. Mid contract pricing changes typically only happen when the seller defaults, the duration extends materially, or operational reality diverges from the original assumption by a wide margin.

The buyer side advisor builds the pricing model in three steps. First, walk through every service in the catalog and assess the demand profile, cost driver, and operational risk for each. Second, assign the appropriate model (fixed fee, cost plus, pass through, or hybrid) to each service. Third, set the mark up levels, the volume caps, the recalibration thresholds, and the duration escalation schedule. The output is a fully priced catalog the buyer can defend through the duration.

Reverse TSA work is delivered under a Fixed Fee or Portfolio Retainer engagement model. The Fixed Fee engagement covers a defined pricing model build for a single transaction. The Portfolio Retainer covers a PE platform with multiple reverse TSAs across portfolio companies and gives the operating partner a consistent pricing discipline across the portfolio. The buyer side advisor scopes the work during diligence and produces a fixed fee proposal within 48 hours of intake.

The pricing model is the contractual mechanism through which the buyer recovers the operational cost of being a reluctant provider. The model needs to be set with care, documented with discipline, and enforced through the duration. Reference also the cost plus glossary entry for the underlying definition. The work pairs with the reverse TSA risk allocation framework.

More on reverse TSA.

The TSA negotiation pillar covers the clause and pricing mechanics behind every reverse TSA. Corporate buyers face the same dynamics from the provider side.