Fixed fee service contract

Fixed fee service contract – IFRS 15 A service provider might enter into fixed fee service contracts. Under these contracts, the customer pays a fixed fee to receive certain services over a fixed period of time when needed.

Examples are maintenance contracts under which the service provider is obliged to repair specified equipment after a malfunction, or car breakdown services in which the provider is obliged to provide roadside assistance or tow the car to a nearby garage. Because the level of service and thereby the obligation of the service provider depends on an uncertain future event, these kinds of contract might meet the definition of an insurance contract.

An entity can, however, make the irrevocable choice to apply IFRS 15 instead of IFRS 17 to these contracts if all of the following conditions are met:Fixed fee service contract

  • The price of the contract does not reflect an assessment of the risk with an individual customer.
  • The contract compensates the customer by providing a service.
  • The insurance risk arises primarily from the customer’s use of services rather than from uncertainty over the cost of the service.

The choice can be made on a contract-by-contract basis.

Construction contracts

Fixed price contract: A construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.

Fixed fee service contract – IFRS 17 A fixed-fee service contract is one in which the level of service depends on an uncertain event but the fee does not. Examples include roadside assistance programmes and maintenance contracts in which the service provider agrees to repair specified equipment after a malfunction. Such contracts can meet the definition of an insurance contract because: (IFRS 17 BC 95)

  • It is uncertain whether, or when, assistance or a repair will be neededFixed fee service contract
  • The owner is adversely affected by the occurrence
  • The service provider compensates the owner if assistance or repair is needed

Although they may meet the definition of insurance contracts, their primary purpose is to provide services for a fixed fee. IFRS 17 permits entities a choice of applying IFRS 15 instead of IFRS 17 to such contracts that it issues if, and only if, they meet specified conditions. The entity may make that choice contract by contract, but the choice for each contract is irrevocable. The conditions are:

  • The entity does not reflect an assessment of the risk associated with an individual customer in setting the price of the contract with that customer.
  • The contract compensates the customer by providing services, rather than by making cash payments to the customer.
  • Insurance risk transferred by the contract arises primarily from the customer’s use of services, rather than from uncertainty over the cost of those services. (IFRS 17 8)

Whether an individual risk assessment is present or not may require the exercise of judgement. In many cases, service agreements are priced to reflect some form of risk assessment. If an entity charges each policyholder the same fee to service the same asset, then the risk assessment is performed at a portfolio level rather than the individual customer level. However, if the fixed fee for servicing is based on the specific condition of the asset (for example, the age or type of motor vehicle), this would appear to be an individual risk assessment that reflects the characteristics of an insurance contract rather than a service contract.


The accounting policy choice between applying IFRS 17 or IFRS 15 applies to fixed-fee service contracts. IFRS 17 does not mention contracts that are priced depending on the level of service. When an entity charges a fee which varies with the level of service provided (e.g., an elevator service contract that levies a fee per breakdown according to the work required), then the contract is unlikely to have significant insurance risk and this would be a service contract within the scope of IFRS 15.


Fixed fee service contractGeneral remarks

A fixed-price agreement (also known as firm-fixed price, firm-price, or fee-for-service contract) is an agreement where the contractor pays a firm price for the agreed-upon work, regardless of the ultimate cost to complete the project. The level of financial risk for the purchasing entity is higher than that of a cost reimbursable contract because the purchasing entity must complete all work, even if there are cost overruns. In addition, the purchasing entity often does not receive payment until after milestones are met, or deliverables accepted. Therefore either real or perceived problems with performance can prevent or delay payment to the purchasing entity, even though expenditures have already been incurred. However, the purchasing entity may also retain any unexpended balances that remain after contracted work is completed. Significant residual balances, however, call into question the integrity of the purchasing entity’s costing practices, or its accounting for costs related to a project and therefore should be mitigated.

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Fixed-price agreements will typically have the following characteristics:

  • Are similar to purchase orders where a work product is delivered, (i.e., container of chemicals or a computer;)
  • Are routine in nature;
  • Have a well-defined statement of work;
  • Are where the outcome is relatively certain;
  • Have a failure rate of next to zero;
  • Are where the purchasing entity bears the risk that a routine project does not come within the “costs” and the purchasing entity has to cover those costs;
  • Normally short-term in nature (< 1 year); and
  • Costs are normally known.

Fixed price contracts are best used when the principal investigator has reasonable prior experience with similar projects and can:

  • Provide an accurate estimate of cost, and
  • Define a tangible deliverable the purchasing entity is to receive.

Fixed fee service contract

Fixed fee service contract

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