The annual true up is where the contract actually gets enforced.

What gets trued up and what does not.

Not every line on the TSA invoice is subject to a true up. The exercise applies to four categories. Variable charges that were billed against a volume estimate. Allocations that were billed against an estimated share of an underlying pool. Pass-through charges that were billed against an estimated third-party invoice. And cost-plus charges where the underlying cost basis was preliminary at the time of billing. Fixed fees do not true up by definition.

The contract specifies which categories true up and at what frequency. Most TSAs run a true up annually at the contract anniversary or at fiscal year end. Some run quarterly true ups for high variance categories. The mechanism is the same. The estimated charges across the period are compared to actuals. The delta becomes a credit memo to the buyer or, less often, an additional invoice from the seller.

In practice the delta runs in the buyer’s favor on most TSAs. Estimates tend to be set conservatively, which from the seller’s perspective means high. Actuals come in lower as Newco’s consumption ramps down through the term. The pass-through is the most volatile category because the underlying third-party contracts often have refunds, rebates, or volume tier breaks that the seller has not yet flowed through.

A typical true up on a $20M annual TSA returns $400K to $1.2M in credits to the buyer. The recovery is independent of the work done on monthly invoice review and the TSA overcharge identification exercise. The two work together. Monthly review catches the visible patterns. The annual true up catches the estimates that did not match reality.

The true up calendar and the data package.

The true up calendar runs in four steps. First, the seller closes out the period and prepares the data package. Second, the buyer receives and reviews the package. Third, queries and disputes flow through the governance committee. Fourth, the final credit memo or invoice is issued. The whole cycle typically runs 60 to 90 days from period end. The contract spells out the exact dates.

The data package is what makes or breaks the exercise. A complete package includes the catalog as originally agreed, the estimated volumes used in billing, the actual volumes consumed, the unit rates applied, the underlying third-party invoices for pass-through, the allocation methodology with full inputs, and any contractual adjustments. Without all seven elements, the buyer cannot reconcile cleanly. The seller’s default package usually omits two or three elements.

The contract should require the seller to deliver the full package within 30 days of period end. Where the contract does not, the request goes in writing as soon as the period closes. Where the seller delivers only a summary, the buyer requests the underlying detail. The right to audit is in the TSA. The buyer enforces it.

The data package review takes a finance analyst three to five days of focused work for a typical TSA. The work is not strategic. It is line by line reconciliation. The savings justify the work. The buyer that skips the review forfeits the credits it is owed under the contract.

The four categories in detail.

Variable charges are the simplest category. The catalog specifies a unit and a rate. The estimate was based on a baseline volume. The actual consumption is in the seller’s billing system. The reconciliation is a multiplication. Estimated volume minus actual volume, multiplied by the unit rate, equals the true up. Where the buyer consumed less, the credit flows back. Where the buyer consumed more, an invoice may issue, though most catalogs cap upside billing at the original estimate plus a stated tolerance.

Allocations are the most contested category. The seller’s overhead pool has a defined methodology in the catalog. The pool total at period end is rarely what was estimated. The buyer’s share is rarely what was used in monthly billing. The reconciliation requires the actual pool total, the actual methodology inputs, and the buyer’s actual share calculated from those inputs. The credit can be substantial where the seller’s actual pool shrank during the year.

Pass-through is the most variable. The seller billed monthly estimates of third-party charges. The third-party invoices arrive on their own cadence with annual rebates, credits, volume tier adjustments, and timing differences. The buyer’s credit equals the difference between what was charged and what the seller actually paid the third-party after all adjustments.

Cost-plus is the most opaque. The seller’s cost basis at year end differs from what was used in monthly billing. The mark-up percentage applies. The true up captures both the cost variance and the mark-up effect. The discipline sits inside the broader TSA cost-plus vs fixed-fee framework.

Disputes and the queries log.

Most true ups produce some disputed lines. The seller’s reconciliation always finds reasons that the buyer’s position overstates the credit. The buyer’s reconciliation always finds reasons that the seller’s position understates the credit. The gap is closed through structured queries against the data package. Each query references a specific line, a specific contractual basis, and a specific requested adjustment.

The queries flow through the governance committee on the schedule set out in the contract. Most queries close within the first committee meeting after the data package is delivered. Where they do not close, the dispute path in the contract applies. Mediation, arbitration, or litigation. True up disputes rarely reach mediation. The amounts are typically small enough that both parties settle at committee.

The discipline that matters is the queries log. Every disputed line is documented with the buyer’s contractual basis. The seller’s response is documented. The committee decision is documented. The credit memo references the log. Where the buyer maintains the discipline, the true up runs faster and the credits flow on schedule.

Where the buyer does not maintain the discipline, the true up becomes a negotiation rather than a reconciliation. The seller offers a round number. The buyer accepts because the alternative is months of dispute. The number is almost always less than what the contract supports. The buyer leaves money on the table.

Contract clauses that make the true up work.

The true up clauses are negotiated at the pre-signing stage along with the rest of the commercial schedule. Four provisions matter. First, the categories that true up. Variable, allocation, pass-through, and cost-plus. The contract should list each category and the methodology. Second, the cadence. Annual at minimum. Quarterly for high variance categories. Third, the data package requirement. The seller delivers a complete package within 30 days of period end. Fourth, the audit right. The buyer has the right to audit the underlying records within a stated window.

Two further clauses strengthen the buyer’s position. A cap on upside true ups. The seller cannot invoice for consumption above estimates without prior approval. A floor on the credit. Where the audit finds underestimated consumption attributable to the seller’s billing error, the credit flows regardless of timing.

The contractual TSA audit rights are the backstop. They allow the buyer to engage an independent auditor where the data package or the seller’s response is inadequate. The audit cost is typically borne by the requesting party unless the audit finds material variance, in which case the cost shifts to the seller. The clause is rarely invoked but its presence shapes the seller’s willingness to provide the underlying detail in the first place.

Where the clauses are absent or weak, the true up runs on the seller’s terms. The buyer accepts whatever the seller offers because there is no contractual basis to demand more. The fix at that stage is renegotiation rather than enforcement.

The terminal true up at TSA exit.

The most important true up is the terminal one. When the TSA ends, every open category gets reconciled one last time. The variable consumption against estimates. The allocations against actual pool totals. The pass-through against final third-party invoices. The cost-plus against final cost basis. The exercise closes the financial relationship between the buyer and the seller.

The terminal true up is more contested than the annual true up because both parties know it is the last one. The seller has limited future leverage over the buyer. The buyer has limited future leverage over the seller. The dispute resolution clauses matter most here. Where the contract provides for binding arbitration on terminal true up disputes, the negotiation proceeds with that backstop in mind.

The buyer’s preparation for the terminal true up starts six months before TSA exit. The queries log is consolidated. The unresolved disputes from prior true ups are documented. The expected credit position is calculated against the contract. The position is presented to the seller as part of the broader exit negotiation. Where the buyer is also negotiating extension fees, the two threads link.

The terminal true up typically returns 1 to 3 percent of total TSA spend back to the buyer. On a TSA with a $50M lifetime cost, that is $500K to $1.5M in final credits. The work is concentrated. The recovery is meaningful. The link between true up management and the exit sequence runs through TSA credits and remedies.

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