Cost to Obtain a Contract
What is a cost to obtain a contract?
A cost to obtain a contract is an incremental cost that would not have been incurred if the contract had not been won. Under ASC 606, such costs generally have to be capitalized as an asset and amortized rather than expensed as they are paid.
Sales commission is the principal example. That single fact is why ASC 606 landed so heavily on commission-driven businesses, and why a revenue-recognition standard ended up reshaping how sales compensation is accounted for.
The test is one question
Strip away the language and the test is simple: would you still have paid this if the deal had been lost?
If no, the cost is incremental and it is a cost to obtain the contract. If yes, it is not.
The last row is the distinction most frequently missed. Costs to obtain get you the contract. Costs to fulfil deliver on it. They are governed by different rules, and lumping implementation cost in with commission is a common error.
Why this reshapes comp design
Here is a consequence that most comp plans have never considered, and that most finance teams have never raised with RevOps.
The incremental test asks whether the payment was contingent on winning. A commission is. A non-recoverable draw is not: it is paid whether or not the rep closes anything. A guaranteed minimum is not. A base salary certainly is not.
Which means the structure of the comp plan changes the accounting. A plan that is heavily weighted toward guaranteed pay generates less capitalizable cost than one weighted toward at-risk commission, even where the total compensation is identical. That is not a reason to design a plan one way or the other, and it is a reason for Finance and RevOps to have a conversation they usually do not have. See pay mix.
What this means?
For Finance, the practical work is establishing, defensibly, which components of sales compensation pass the incremental test and which do not. That is a per-component judgment, not a blanket one: the same rep's pay packet can contain capitalizable commission, non-capitalizable draw, and non-capitalizable salary, all in the same month.
Doing that at all requires knowing which commission attached to which contract, and which portion of a rep's pay was contingent versus guaranteed. That is a level of detail a payroll total cannot supply, and it is another reason the accounting requirement so often drives the commission-system decision. See commission expense recognition.
This page explains general accounting concepts and is not accounting or tax advice. Treatment depends on your facts, your jurisdiction, and your auditor. Confirm with a qualified professional.
How Visdum supports the analysis
Visdum models each element of a comp plan as its own component, which means commission, bonus, SPIFF, MBO, and draw are distinguishable rather than blended into a single payout figure.
That distinction is exactly what the incremental test needs. Finance can identify which portion of a rep's pay was contingent on winning a specific contract, and therefore capitalizable, and which was guaranteed and therefore not. Because commission is calculated per deal, the capitalizable amount can be attributed to the contract that generated it rather than allocated from a total, which is what makes the amortization schedule defensible.
Take a self-guided product tour to see this in action, or read the complete commission close playbook.
Related terms
Capitalized Commissions · Commission Amortization · ASC 606 · Commission Expense Recognition · Deferred Commission
Calculate your OTE in 30 seconds
Frequently asked questions
What is a cost to obtain a contract?
A cost to obtain a contract is an incremental cost that would not have been incurred if the contract had not been won. Under ASC 606 such costs generally have to be capitalized and amortized rather than expensed as paid. Sales commission is the principal example, which is why the standard matters so much to commission-driven businesses.
What is the test for an incremental cost?
One question: would you still have paid it if the deal had been lost? If the answer is no, the cost is incremental and qualifies as a cost to obtain the contract. If the answer is yes, it does not. Base salary fails the test. A performance-contingent commission passes it.
Is sales commission a cost to obtain a contract?
Usually yes, and it is the principal example given under the standard. A commission paid only because the deal was won would not have been incurred if it had been lost, which makes it incremental. That is precisely why ASC 606 had such a large impact on how commission-heavy businesses report their costs.
What is the difference between a cost to obtain and a cost to fulfil?
Costs to obtain get you the contract, such as commission. Costs to fulfil deliver on it, such as implementation and onboarding. They arise at different points and are governed by different rules, and lumping implementation cost together with commission is a common and consequential error.
Does base salary count as a cost to obtain a contract?
No. The rep is paid their salary whether or not they win the deal, so it is not incremental. The same reasoning applies to a bonus payable regardless of outcome, to sales travel, and to advertising spend. All of these would have been incurred anyway, which is exactly what disqualifies them.
Does comp plan structure affect the accounting?
Yes, and this is rarely discussed. A commission is contingent on winning, so it is incremental. A non-recoverable draw or guaranteed payment is not. A plan weighted toward guaranteed pay therefore generates less capitalizable cost than one weighted toward at-risk commission, even at identical total compensation.