What is a true-up?
Written by Arnon Shimoni
✓ Expert
Last updated on:
A true-up is the invoice that settles the difference between what a customer committed to and what they used. It is issued at the end of a contract term or at an agreed checkpoint, such as each quarter, and it closes the gap in either direction: the customer pays for the shortfall against a minimum, or pays for usage above what was invoiced during the term.
Example: a customer commits to €120,000 over 12 months and is invoiced €10,000 a month. Actual usage at contract rates comes to €131,500. The true-up invoice in month 12 is €11,500. Had usage come to €112,000, the true-up would be €8,000, the amount needed to reach the commitment.
At a glance | |
|---|---|
What it settles | Committed amount vs actual usage over a term |
When | End of term, or quarterly or annually inside a multi-year deal |
Direction | A charge (shortfall or excess usage) or, less often, a credit |
Needs | The commit, the drawdown schedule, metered usage and the contract rate on one ledger |
True-up vs overage
Both charge for usage beyond a commitment. Overage is billed every period, as it happens. A true-up is one reconciling invoice at a checkpoint. Many contracts use both: overage for usage above the monthly drawdown, and a true-up at term end for any shortfall against the annual minimum.
Overage | True-up | |
|---|---|---|
When billed | Each billing period | At term end or an agreed checkpoint |
What it covers | Usage above the period's included amount | Net difference between committed and used over the whole term |
If usage is below commit | Nothing extra; the commit is paid | The shortfall is invoiced to reach the commit |
If usage is above commit | Billed as it happens | Billed once, for the part not already invoiced |
Cash-flow effect | Smooth | One larger invoice |
Annual true-up example
A 12-month contract with a €120,000 minimum commitment, invoiced as €10,000 per month. Usage is metered at contract rates. The contract says monthly shortfalls are carried and the net position is settled at the end of the year.
Month | Invoiced | Usage at contract rate | Cumulative usage | Position vs commit |
|---|---|---|---|---|
1 | €10,000 | €9,200 | €9,200 | -€800 |
2 | €10,000 | €9,800 | €19,000 | -€1,000 |
3 | €10,000 | €11,400 | €30,400 | +€400 |
4 | €10,000 | €10,100 | €40,500 | +€500 |
5 | €10,000 | €8,700 | €49,200 | -€800 |
6 | €10,000 | €12,300 | €61,500 | +€1,500 |
7 | €10,000 | €10,900 | €72,400 | +€2,400 |
8 | €10,000 | €11,600 | €84,000 | +€4,000 |
9 | €10,000 | €12,000 | €96,000 | +€6,000 |
10 | €10,000 | €11,200 | €107,200 | +€7,200 |
11 | €10,000 | €12,100 | €119,300 | +€9,300 |
12 | €10,000 | €12,200 | €131,500 | +€11,500 |
True-up | €11,500 | Settled |
Total invoiced for the year: €131,500, which equals usage. If the year had closed at €112,000 of usage, the true-up would have been a charge of €8,000 and the customer would have paid the full €120,000 commitment for €112,000 of usage.
True-up for seats vs usage
Seat contracts true up on a count. The customer licensed 500 seats and provisioned 540 by month 9. At the checkpoint the vendor invoices 40 seats, usually from the month each was added, and resets the licensed count to 540 for the next period. Seat true-ups are simple to compute but need an accurate provisioning log, because the dispute is always about when a seat was added.
Usage contracts true up on a metered total. The dispute is rarely about the count, which the meter records, and more often about the rate: which tier applies to the total, and whether a volume commitment that was missed re-rates the whole term at a higher price. Both cases need the contract terms stored as data on the subscription so that the true-up is computed by the billing system rather than assembled in a spreadsheet.
True-up and revenue recognition
A true-up changes the transaction price after revenue has been recognised during the term. Under ASC 606 and IFRS 15 the usage above the commitment is recognised when the usage occurs, if it can be measured, so the true-up invoice for excess usage mostly bills revenue that is already in the books. A shortfall true-up is different: the minimum was known from the start, so most of it should already have been recognised over the term, and the invoice only moves cash. Billing and rev rec need to share the same commit and usage data for the two to agree.
Where Solvimon fits
Solvimon stores the commitment, the drawdown schedule, the carry rule and the overage rate on the subscription and rates metered usage against them. The true-up is generated from the ledger at the checkpoint, with the usage detail attached, and the same data drives revenue recognition.
Frequently asked questions
What is a true-up?
A true-up is the invoice, or occasionally credit, that settles the difference between what a customer committed to and what they actually used, issued at the end of a term or at an agreed checkpoint.
When is a true-up billed?
At the end of the contract term, or at checkpoints written into the contract, typically each quarter or each anniversary of a multi-year deal.
Is a true-up a credit or a charge?
Usually a charge: either for usage above what was invoiced during the term, or for the shortfall against a minimum. A credit true-up only happens when the customer prepaid more than the contract allows them to lose, and the contract provides for a refund or rollover.
What is the difference between a true-up and overage?
Overage is billed each period as usage exceeds the included amount. A true-up is a single reconciliation at a checkpoint. A contract can have both.
How is a seat true-up calculated?
Seats provisioned above the licensed count, multiplied by the seat price, usually prorated from the month each seat was added, with the licensed count reset for the next period.
Related
Minimum commitment. The floor the true-up settles against.
Overage charges. Per-period billing for usage above the included amount.
Volume commitments. Quantity commits and what happens when they are missed.
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