Why contract form affects margins and the balance sheet
In Swiss SMEs operating in construction, engineering, IT or professional services, the structure of the client contract determines not only the profitability of the engagement, but also how revenue and costs must be recorded in the accounts. The two most common models are the cost-plus contract (cost-plus, time and material with fee) and the fixed-price contract (lump sum, forfait).
Under the cost-plus model, the client reimburses actual costs incurred — materials, labour hours, out-of-pocket expenses — plus additional compensation expressed as a percentage (mark-up) or fixed amount. Under the fixed-price model, by contrast, the total price is agreed in advance: any cost overruns remain the contractor's responsibility, while any savings increase the margin.
The choice between the two models has direct implications for operational risk management, liquidity, VAT and revenue recognition under the Swiss Code of Obligations (CO, art. 957 et seq.) and Swiss GAAP FER. This guide analyses both forms with a practical focus for entrepreneurs, controllers and trustees.
At a glance: cost-plus vs fixed price
Before negotiating a B2B contract, it is worth systematically assessing the differences in price, risk and accounting obligations:
| Criterion | Cost-plus | Fixed price (lump sum) |
|---|---|---|
| Basis of compensation | Documented costs + mark-up or fixed fee | Total amount agreed regardless of actual costs |
| Overrun risk | Primarily borne by the client | Borne by the contractor, unless variation clauses apply |
| Transparency towards the client | High — periodic cost reporting | Low — the client pays a final price |
| Operating margin | Predictable if the mark-up is clearly defined | Variable — depends on execution efficiency |
| Suited to projects | Uncertain scope, long duration, evolving specifications | Defined perimeter, costs estimable with precision |
| Liquidity | Billing on actual costs or advances on costs incurred | Advances or milestones — risk of front-loading costs |
| Legal basis (CO) | Contract for work (art. 363 et seq. CO) or agency contract (art. 394 et seq. CO) | Contract for work (art. 363 et seq. CO) |
| Revenue recognition | When the right to compensation arises (costs + fee), as a rule upon periodic invoicing | Progressive (POC) or upon completion, under FER 22 if multi-year |
| Accounting complexity | Medium — separation of reimbursable costs and fee | High — WIP, completion estimates, provisions |
| Typical sectors in Switzerland | IT consulting, engineering, industrial maintenance | Construction, installations, bespoke software with fixed scope |
Cost-plus contracts: structure and margins
Under cost-plus, the company's revenue derives from two distinct components: reimbursement of eligible direct and indirect costs, and additional compensation (fee). Contractual clarity on both items is essential to avoid disputes and to correctly record revenue.
Cost-plus with percentage mark-up
The client reimburses eligible costs plus an agreed percentage (e.g. direct costs + 15%, or total costs + 10%). The mark-up represents the contractor's gross margin and is tax-relevant: it must be invoiced separately or clearly identified on the invoice.
Note: include in the contract a precise definition of "eligible costs" — hours for which categories, materials, travel expenses, allocated indirect costs — and a verification procedure (monthly reports, access to the contractor's accounting records by the client, if provided for).
Cost-plus with fixed fee
Costs are reimbursed at net and the company's compensation is a fixed monthly amount or amount per phase (fixed fee). The margin is more predictable, but erosion risk remains if costs exceed internal estimates without contractual adjustment.
This model is common in consulting and project management contracts. The fixed fee is recognised as revenue regardless of costs incurred, while cost reimbursements ideally pass through without margin, except where the contract provides for mark-up on materials.
Note on accounting for reimbursements: if the company invoices costs and fee as a single line item, the margin becomes opaque and complicates profitability analysis by project. Separating the items on the invoice and in management accounting (cost centre / project) is good practice for tax and audit reviews as well.
Fixed-price contracts: margins, risks and variations
Under a fixed-price contract, the contractor undertakes to deliver the work or service for a specified amount. The margin depends entirely on the ability to meet budget, deadlines and quality. It is the model preferred by clients who want cost certainty, but it concentrates execution risk on the performing company.
Under the CO (art. 363 et seq.), the contractor for a work contract must deliver the agreed result. Changes requested by the client after signing may justify a price adjustment, but only if documented as contractual variations. Without clear clauses on change orders and scope creep, the company risks eroding margin with no possibility of recovery.
| Type of risk | Impact on margin | Contractual mitigation |
|---|---|---|
| Underestimation at quotation stage | Negative or zero margin on the entire project | Contingency buffer, price revision for indexed materials |
| Uncompensated variations | Extra costs borne by the contractor | Change order clause with written approval before execution |
| Client delays | Extended fixed costs, margin erosion | Mutual penalties, price adjustment for standstill |
| Raw material price fluctuations | Materials more expensive than expected | Price escalation clause or advances on purchases |
| Warranty and defects | Unexpected post-delivery costs | Warranty provision in the accounts, CO time limits (art. 367) |
Compliant accounting: CO and Swiss GAAP FER
Swiss SMEs subject to the obligation to keep accounts (art. 957 et seq. CO) must record revenue and costs so that the financial statements present a true and clear picture of assets and financial position. For companies applying Swiss GAAP FER, revenue recognition follows the accrual principle of the FER Framework and, for multi-year contracts, FER 22.
Cost-plus — accounting treatment
- •Reimbursable costs: charged to the project as direct costs. If invoiced to the client without mark-up as true disbursement items (expenses incurred in the name and on behalf of the client, art. 24 para. 6 lit. b VAT Act), they do not constitute revenue or operating expense; otherwise they must be recorded gross as revenue and expense.
- •Mark-up / fee: recognised as revenue at invoicing or, for periodic fees, ratably over the relevant period (accrual principle of the FER Framework).
- •Receivables from clients: recorded net of any advances received. Costs incurred in advance and not yet invoiced may give rise to assets (prepaid costs on contracts) if the right to reimbursement is certain.
- •Management accounting: every cost-plus contract should have a cost centre or internal order to track hours, materials and actual margin.
Fixed price — accounting treatment
- •Percentage-of-completion method (POC): for multi-year or long-term contracts, revenue is recognised in proportion to the degree of completion (cost-to-cost, hours worked or milestones), under FER 22. The corresponding cost is charged at the same pace, giving rise to assets (work in progress — WIP) or liabilities (excess advances invoiced).
- •Completed-contract method: permissible for short contracts or when progress cannot be estimated reliably. Revenue and costs are recognised upon delivery of the work.
- •Expected losses: if estimated costs exceed the contract price, a contract loss must be recognised immediately (FER 22, prudence principle of the FER Framework) and a provision or accrual recorded.
- •Advances and partial invoices: clear distinction between advances received (liability until revenue is recognised) and invoices issued for completed milestones (revenue).
Practical example: WIP on a fixed-price contract
A Ticino construction company accepts a fixed-price contract of CHF 500,000 for the renovation of an office, with execution expected over 10 months. As at 31 December, after 6 months of work, costs incurred amount to CHF 280,000 and estimated progress is 60%.
| Item | Amount (CHF) | Accounting notes |
|---|---|---|
| Contract price | 500,000 | Total expected revenue |
| Costs incurred as at 31.12 | 280,000 | Materials, labour, hire charges |
| Earned revenue (60% POC) | 300,000 | 500,000 × 60% — posted to revenue |
| Earned margin | 20,000 | 300,000 − 280,000 |
| Advances already invoiced | 200,000 | Receivable from client or liability for advances |
| Billing to be issued (WIP) | 100,000 | 300,000 earned revenue − 200,000 already invoiced |
At year-end closing, the company records CHF 100,000 as a receivable from the client (work in progress not yet invoiced) or adjusts the excess between earned revenue and invoiced amounts. This step is central to a true and fair balance sheet and for income tax: revenue earned but not yet collected is still tax-relevant in the relevant financial year.
VAT: differences between the two models
Under the VAT Act, with the agreed consideration method (art. 39 para. 1 VAT Act) — the default method — the tax liability generally arises upon issuance of the invoice, including partial invoices, or upon receipt of advances (art. 40 VAT Act). In multi-year contracts, VAT therefore follows invoices issued, regardless of accounting revenue recognition (POC).
In cost-plus contracts, if the company invoices cost reimbursements and the fee separately, the fee and reimbursements with mark-up are taxable; reimbursements of expenses incurred in the name and on behalf of the client, if separately designated as disbursement items (art. 24 para. 6 lit. b VAT Act), are not included in the tax base. In practice, many SMEs invoice a single amount including costs and mark-up, simplifying VAT management but making the margin less transparent.
For fixed-price contracts with advances, VAT is due on the advance at the time of invoicing. The accounts must reconcile the VAT balance due with POC revenue recognition to avoid discrepancies between quarterly VAT settlement and the income statement.
Hybrid models and clauses to negotiate
In Swiss commercial practice, it is common to combine elements of both models. Some recurring configurations:
Target cost with savings sharing
The client reimburses costs up to a cap (target cost); if actual costs are lower, the saving is shared according to an agreed formula. Accounting requires accurate estimates and documentation of the target at quotation stage.
Fixed price with time and material for extras
Base scope at lump sum; out-of-scope requests are billed on actual costs. It is essential to define in the contract what falls within the fixed scope and to activate a formal change order process.
Guaranteed maximum price (GMP)
A variant of cost-plus with a maximum spending cap. The client reimburses costs up to the cap; any excess remains the contractor's responsibility. It combines cost transparency with a limit on the client's risk, but requires rigorous cost monitoring.
Checklist for entrepreneurs and trustees
- 1Define in writing in the contract the basis for calculating compensation, eligible costs and the reporting procedure.
- 2For fixed-price contracts, include clauses on variations, price revision and management of client delays.
- 3Open a cost centre or accounting project for every material contract, regardless of the model chosen.
- 4Choose the revenue recognition method (POC or completed contract) and apply it consistently throughout the contract term.
- 5Monitor expected vs actual margin monthly; for fixed-price contracts, update final cost estimates and recognise expected losses promptly.
- 6Reconcile at year-end closing invoiced amounts, earned revenue (POC), advances and WIP position; document adjustments for audit and income tax purposes.
- 7Verify the VAT treatment of partial invoices, advances and expense reimbursement components before issuance.
Which model to choose?
There is no universal answer. Cost-plus protects margin when project scope is uncertain or subject to frequent changes, but requires transparency and the ability to report costs in a timely and verifiable manner. Fixed price offers the client predictability and can generate high margins for efficient companies, but concentrates execution risk on the contractor.
From an accounting perspective, multi-year fixed-price contracts require greater effort in terms of estimates, WIP and provisions, while cost-plus contracts simplify revenue recognition but require discipline in separating pass-through costs from margin. In both cases, well-structured project accounting — facilitated by software such as Accountex — enables real-time profitability monitoring and year-end closing with financial statements compliant with Swiss standards.