TSA Renegotiation
Pricing is the term the seller designed.
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TSA pricing models decide what the buyer pays for the transition period. Cost-plus, fixed-fee, and pass-through each behave differently as scope shifts, and the right model depends on the service. This article maps the three core structures, the hybrids that combine them, and the pricing posture that protects buyer value as part of the broader TSA negotiation framework.
Cost-plus is the pricing model most sellers propose first. The buyer pays the seller's documented cost plus a mark-up percentage. The cost component typically includes direct labor, allocated overhead, and third-party invoices. The mark-up sits between 0 and 15 percent depending on the service and the negotiation. Cost-plus protects the seller from cost escalation and from volume variance. It also exposes the buyer to both.
The mechanics matter. Cost-plus invoices show actual cost components, the mark-up calculation, and a total. The buyer should require detailed cost documentation, not just summary line items. Without detail, the cost component is impossible to audit. The seller's accounting team has discretion over allocation rates, overhead pools, and timing of cost recognition. Each of these levers can move the invoice by single digit percentages with no formal change.
Cost-plus fits services where the cost base is variable and the volume is uncertain. Application support where the headcount required depends on issues raised. Infrastructure where capacity varies with the business. Professional services that may or may not be needed. For these services, fixed-fee would either over price or under price, depending on the assumption set.
Cost-plus does not fit services where the cost base is well understood and stable. Payroll processing, accounts payable, standard finance closes, and routine reporting are predictable enough that fixed-fee produces a cleaner outcome. When the seller proposes cost-plus for a stable service, the buyer should test fixed-fee as the counter. The benchmark mark-up ranges for cost-plus services are covered in detail in TSA mark-up benchmarks.
Fixed-fee is the pricing model most buyers prefer when it fits. The buyer pays a defined monthly amount regardless of cost or volume variance. The seller absorbs cost escalation and volume movement within a defined band. Fixed-fee produces predictable invoices, simplifies governance, and removes one category of monthly dispute. The buyer trades flexibility for certainty.
The volume band is the term that matters in fixed-fee. The contract defines a baseline volume and a tolerance band, typically plus or minus 15 to 25 percent. Volume within the band stays at the fixed price. Volume outside the band triggers a price adjustment using a defined per-unit rate. Without a clear band, fixed-fee turns into cost-plus the first time volume shifts.
Fixed-fee works best for services with stable volume and predictable cost. Payroll, accounts payable, accounts receivable, standard close, basic infrastructure, and help desk are typical examples. The seller knows the cost. The buyer knows the volume. The contract simply translates that knowledge into a monthly number. For these services, fixed-fee removes the audit burden and lets both sides focus on operations.
Fixed-fee fails when scope is poorly defined or when the underlying activities shift. A fixed-fee finance service that turns out to include treasury work the buyer expected, or excludes treasury work the buyer assumed, becomes a dispute. The discipline of detailed service descriptions, named exclusions, and volume baselines is the discipline that makes fixed-fee actually fixed. The fixed-fee versus cost-plus trade-off is covered in TSA cost-plus vs fixed-fee.
Pass-through pricing applies to third-party costs the seller incurs on behalf of the buyer. Software license fees, infrastructure charges, telecom, facilities. The seller invoices the buyer for the third-party charge with no mark-up. The intent is that the buyer pays the actual cost of the underlying service while the seller manages the contract administration during the TSA period.
In practice, pass-through often includes mark-up that should not be there. The seller's first draft typically defines pass-through to include allocated overhead, administrative fees, or a flat percentage. Each of these turns pass-through into a hidden cost-plus. The buyer's posture should be that pass-through means the invoice from the third-party with no addition, full stop. If the seller needs administrative recovery, it should be priced separately in the service catalog.
The audit right matters for pass-through. The buyer should require copies of the underlying third-party invoices on every pass-through line, not just totals. Without the underlying invoice, pass-through is a number the seller asserts. With the underlying invoice, pass-through is a number the buyer can verify. This is also where shadow billing surfaces, which is covered in TSA shadow billing.
Pass-through fits services where the cost is genuinely third-party and the seller adds no value beyond administration. Software licenses, cloud infrastructure, and direct vendor payments are typical examples. Pass-through does not fit services where the seller adds meaningful operational support, because then the seller is not just passing through, the seller is providing a service that should be priced and disclosed.
Most real TSAs combine all three pricing models. The service catalog mixes fixed-fee services for stable activities, cost-plus services for variable activities, and pass-through items for third-party costs. The mix should be deliberate, not accidental. Each service should be priced using the model that fits its cost behavior, not the model the seller's first draft applied uniformly.
The buyer's pricing redline should walk through each service and ask one question. Is the cost stable enough for fixed-fee, variable enough to justify cost-plus, or is this a third-party invoice that belongs in pass-through? The answer depends on the service, not on the seller's preference. The redline turns a uniform pricing schedule into a tailored schedule that reflects the actual operations.
Common hybrid patterns. Fixed-fee for back office services with a defined volume band, with a per-unit rate for volume outside the band. Cost-plus for IT application support with a documented mark-up and capped overhead allocation. Pass-through for software licenses and infrastructure with the underlying invoice required on every line. Each service is treated on its own terms, not bundled into a single uniform structure.
The pricing schedule should be an exhibit to the TSA, not a paragraph in the body. The exhibit format lets the parties update specific lines without reopening the whole agreement. The exhibit also makes it easier for finance and operations to use the contract during the TSA period, which is the moment when the pricing schedule actually matters.
The buyer's pricing posture in the TSA negotiation should be specific, benchmarked, and unmoved by tactics. Specific means a written counter for each service. Benchmarked means rates anchored to market data, not preference. Unmoved by tactics means the buyer does not accept the seller's framing that pricing is not a commercial item because the seller is providing the service at cost.
Sellers typically frame TSA pricing as a cost recovery exercise, not as a profit centre. The framing is partly true and partly misleading. The direct cost is recovered, but the overhead allocation and mark-up are profit. The buyer who accepts the framing accepts the pricing. The buyer who tests the framing against benchmarks finds room to negotiate.
The pricing negotiation should not be the last item on the agenda. It is too important and too detailed to address in the closing days. The buyer's pricing redline should be in the seller's hands within two weeks of receiving the first draft. The pricing negotiation needs time, financial input, and detailed comparison against benchmarks. Rushing it at the end is a guaranteed buyer-side mistake.
The single best practice is involving the operating partner in the pricing redline. The operating partner brings cross-deal benchmarks, has authority to make commercial trades, and signals to the seller's deal team that pricing is a senior buyer-side priority. The operating partner does not need to be in every meeting, but should be in the meetings where the pricing structure is set.
The trade-off between cost-plus and fixed-fee pricing and how to decide which one fits each service.
Read the article →Market ranges for cost-plus mark-up by service category and how to use benchmarks in negotiation.
Read the article →What pass-through should and should not include, and the audit discipline that keeps it honest.
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Fixed-fee proposal in 48 hours. Senior team on day one. The first conversation is always free.
Seven buyer-side moves to exit a Transition Services Agreement on time and below budget. The mark-up, the extension-fee curve, exit sequencing, and the 11-month calendar.
A representative benchmark report on where TSA cost-plus mark-up belongs by service category, how to validate pass-throughs, and where the extension-fee curve becomes a penalty. On a representative $48M-revenue carve-out, reading the price stack the way the seller built it recovers $0.7M the headline discount never touches.
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