Why onerous contract matters to a first-time founder
A long-term deal can become loss-making when wages, materials or delivery requirements change. Under applicable accounting standards, that may require a provision before all losses are paid. Early detection helps founders renegotiate, exit where permitted and avoid treating committed losses as merely a future problem.
Examples of onerous contract
A caterer agrees to supply meals for two years at a fixed price. Ingredient and labour costs rise so sharply that fulfilling the remaining orders will cost ¥9 million more than the expected revenue. After checking cancellation costs, the company assesses and records the required provision.
Common misunderstanding
A contract is not onerous simply because its margin is disappointing. The test compares unavoidable costs with expected economic benefits and may include the cost of terminating the contract. Detailed treatment differs between IFRS and other frameworks, so founders should obtain accounting advice.
When to use it
Use the term when reviewing fixed-price, long-term or loss-making commitments and during financial close. Estimate remaining benefits, fulfilment costs and exit penalties using the applicable accounting policy. Reassess when prices, scope or legal enforceability change, and document assumptions supporting any provision.