[FR] Clarify definitions of EffectiveCost vs BilledCost across providers

[Matt-Cowsert]

Problem Statement

The current specification for EffectiveCost and BilledCost contains ambiguities that lead to inconsistent implementation across FOCUS data generators, creating accuracy issues for practitioners performing accrual-based accounting and cost allocation.

Core Issues Identified

1. Ambiguous Accrual-Based Accounting Guidance

The current EffectiveCost definition emphasizes prepaid purchase scenarios but lacks clarity on:

• What EffectiveCost represents when no prepaid purchase exists (the majority of cloud spend)
• When providers should vs. should not populate EffectiveCost
• How to handle scenarios where the provider doesn't know the accrual schedule

Current definition states: "Effective Cost represents the amortized cost of the charge after applying all reduced rates, discounts, and the applicable portion of relevant, prepaid purchases (one-time or recurring) that covered this charge."

Gap: This definition focuses on amortization but doesn't clearly establish that EffectiveCost is fundamentally about accrual-based accounting, leading some data generators to populate estimated or incorrect values when they don't have actual usage information.

2. Data Generator Accuracy Concerns (Not "Double Counting")

Note: The Oct 31 meeting reframed this from "double counting" to "accuracy."

The specification lacks clear normative requirements preventing data generators from populating EffectiveCost with made-up or estimated values when they don't have actual usage/accrual information. This creates data accuracy issues, particularly in marketplace scenarios where:

• CSP has the purchase record but not the usage details
• SaaS provider has usage details but not the purchase record
• Both may attempt to report EffectiveCost, leading to inaccurate aggregations

Key insight from TF3: The issue isn't "double counting" (which implies both datasets are accurate) but rather that providers are reporting inaccurate EffectiveCost values when they don't have sufficient information.

3. Inconsistent Normative Requirements

Current normative requirements contain ambiguities and potential contradictions:

• Requirements about when BilledCost and EffectiveCost must match
• Scenarios where BilledCost must be zero but EffectiveCost should reflect usage
• Treatment of partial upfront commitments
• Handling of prepaid vs. post-paid payment models

4. Incomplete Use Case Coverage

The definition doesn't adequately address:

• No-upfront commitments (pay-as-you-go)
• Partial upfront scenarios with mixed payment models
• Annual commitments billed monthly
• Marketplace purchases where purchase and usage are from different data generators
• SaaS licensing where usage tracking isn't possible

5. Terminology Misalignment

The term "amortization" as used in FOCUS/FinOps differs from traditional finance:

• FOCUS: Distribution based on actual consumption
• Traditional Finance: Estimated time-based distribution
• This creates confusion for practitioners with financial backgrounds and may not accurately describe the column's purpose

Real-World Impact:

• Practitioners cannot reliably perform accrual-based cost allocation across providers
• Data generators implement inconsistent interpretations, reducing FOCUS interoperability
• Chargeback workflows break when EffectiveCost includes inaccurate estimates
• Marketplace cost reconciliation requires manual filtering and workarounds

---

Use Case

Primary User Story: FinOps Practitioners

As a FinOps Practitioner
I need to understand which column (BilledCost vs. EffectiveCost) represents the accurate cost at time of usage across all my providers and payment models
So that I can perform accurate accrual-based cost allocation, chargeback, and financial reporting without worrying about data accuracy issues or needing provider-specific logic

Secondary User Story: Data Generators

As a FOCUS Data Generator
I need to clear normative requirements defining when I must, should, or must not populate EffectiveCost based on whether I have actual usage/accrual information
So that I can implement FOCUS conformantly and provide accurate data to my customers, particularly in complex scenarios like marketplace purchases and mixed payment models

Acceptance Criteria (REVISED - Milestone-Based)

The working group agreed to a three-milestone approach to address this incrementally:

Milestone 1: Definition Alignment

• High-level definitions for BilledCost and EffectiveCost are grammatically and semantically congruent, establishing clear purpose and relationship without diving into scenario specifics

Success criteria for Milestone 1:

• Definitions clearly establish that EffectiveCost represents accrual-based accounting
• Definitions avoid implying EffectiveCost should only be populated for prepaid scenarios
• Definitions clarify the fundamental difference: BilledCost = cash basis, EffectiveCost = accrual basis
• Definitions set foundation without getting bogged down in edge cases

Milestone 2: Clean Up Existing Normative Requirements

• Normative requirements are reviewed and clarified to eliminate ambiguities and contradictions, with particular focus on:

• When EffectiveCost must be populated vs. should be omitted

• When BilledCost and EffectiveCost must match (within single provider) vs. when they diverge

• Requirements for purchase records vs. usage records

• Handling of fully covered charges (zero BilledCost scenarios)

• Clear conformance requirement: Data generators must NOT populate EffectiveCost with estimated or made-up values when they lack actual usage/accrual information

Example: Marketplace CSP that has purchase record but no usage data should NOT estimate EffectiveCost distribution

Milestone 3: Scenario-Based Guidance

• The specification provides clear guidance on how BilledCost and EffectiveCost should be populated across common payment model scenarios:

• All-upfront commitments

• No-upfront commitments

• Partial-upfront commitments

• Annual commitments with different billing intervals

• Marketplace purchases (multi-provider scenarios)

• SaaS licensing scenarios

• Practitioners can distinguish between accurate EffectiveCost (based on actual usage) and scenarios where EffectiveCost should not be populated due to lack of information

Cross-Cutting Acceptance Criteria (All Milestones)

• The specification addresses the relationship between BilledCost and EffectiveCost for both single-provider and multi-provider (marketplace) scenarios, with clear guidance on:

• When aggregations must match (within provider, over time)

• When aggregations will NOT match (cross-provider marketplace scenarios)

• How practitioners should handle correlation across providers

• Practitioners can perform the following use cases without custom provider-specific logic:

• Accrual-based cost allocation and chargeback

• Cash-basis vs. accrual-basis financial reporting

• Accurate tag coverage reporting (excluding charges where BilledCost = 0 due to prepayment)

• Marketplace cost reconciliation with understanding of which provider has authoritative usage data

• Terminology is consistent with either standard accounting practices OR clearly defined as FOCUS-specific (e.g., if continuing to use "amortization," explicitly note it differs from traditional financial amortization)

---

Supported Features Proposal

Current State Assessment

[ ] Enhances existing feature: Effective Cost Analysis

• Current Gap: Feature describes EffectiveCost as "cost after negotiated discounts, commitment discounts, and amortization" but doesn't clarify when EffectiveCost should vs. should not be populated (or populated as zero), leading to data accuracy issues in marketplace and commitment scenarios
• Needed Capability: Practitioners need clear guidance on when EffectiveCost represents actual accrual-based accounting vs. when EffectiveCost should be zero irrespective of data generators' understanding of usage.

[ ] Enhances existing feature: Cost Comparison

• Current Gap: Feature supports comparing cost columns but doesn't address when BilledCost and EffectiveCost diverge vs. when they should match, or how to handle marketplace scenarios where purchase and usage are from different providers
• Needed Capability: Practitioners need to understand cash-basis vs. accrual-basis views and when cross-provider aggregations will not match

[ ] Enhances existing feature: Commit Usage and Under Usage

• Current Gap: Feature shows commitment tracking but doesn't address how different payment models (all-upfront, no-upfront, partial-upfront) affect BilledCost vs. EffectiveCost behavior
• Needed Capability: Practitioners need clear patterns for analyzing commitment utilization across different payment models

[ ] Enhances existing feature: Billed Cost and Invoice Alignment

• Current Gap: Feature focuses on invoice reconciliation but doesn't address relationship between cash-basis (BilledCost) and accrual-basis (EffectiveCost) views for financial reporting
• Needed Capability: Practitioners need to reconcile cash and accrual views for GAAP-compliant reporting

Enhancement Approach (Milestone-Based)

Following the three-milestone approach, the supported feature enhancements would be staged:
Milestone 1 (Definition Alignment): Minimal feature changes - update high-level descriptions to clarify BilledCost = cash basis, EffectiveCost = accrual basis

Milestone 2 (Normative Requirements): Refine column dependencies and add supporting context about when columns must/should/must not be populated

Milestone 3 (Scenario Guidance): Major enhancements with scenario-specific guidance, updated queries, and usage patterns

Approach: Enhance Existing Supported Features (Milestone 3)

Enhancement to "Effective Cost Analysis" Feature

Current Feature Description:

FOCUS enables practitioners to analyze costs without having to distribute upfront fees and discounts, taking discounts and the amortization of upfront fees paid for services into account. The EffectiveCost column represents cost after negotiated discounts, commitment discounts, and the applicable portion of relevant, prepaid purchases (one-time or recurring) that covered this charge. EffectiveCost is commonly utilized to track and analyze spending trends.

Draft Enhancement - Revised Description:

FOCUS enables practitioners to perform accrual-based cost analysis, representing the cost of resources at the time of actual usage after applying all discounts and the applicable portion of prepaid purchases. The EffectiveCost column represents accrual-basis accounting: the cost is recognized when usage occurs, regardless of when payment was made. This differs from BilledCost, which represents cash-basis accounting: the cost recognized when payment obligations are incurred.

Key Principles (Milestone 3):

• EffectiveCost is populated when the data generator has actual usage information and can accurately attribute costs to usage periods
• EffectiveCost should NOT be populated with estimated or interpolated values when the provider lacks actual usage data (e.g., marketplace CSP with purchase record but no usage details)
• For scenarios without prepaid purchases, EffectiveCost typically equals BilledCost (within single provider, over the commitment term)
• EffectiveCost enables accurate accrual-based chargeback and cost allocation without manual distribution of upfront fees

Draft Enhancement - Add to Directly Dependent Columns:

• EffectiveCost
• BilledCost (add - for understanding cash vs. accrual relationship)
• ChargeCategory (add - Purchase vs. Usage affects interpretation)

Draft Enhancement - Add to Supporting Columns:

• BillingPeriodEnd
• BillingPeriodStart
• ChargeCategory
• ChargePeriodEnd
• ChargePeriodStart
• ConsumedQuantity
• ConsumedUnit
• PricingQuantity
• ServiceProviderName
• RegionName
• ServiceName
• CommitmentDiscountId (add - for commitment scenarios)
• CommitmentDiscountStatus (add - for identifying covered usage)

Enhancement to "Cost Comparison" Feature

Current Feature Description:

FOCUS supports the comparison of cost columns in order to identify savings, amortization, or other constructs.

Draft Enhancement - Revised Description:

FOCUS supports the comparison of cost columns to identify savings, analyze different accounting views (cash-basis vs. accrual-basis), and understand cost structures across payment models.

Key Comparison Patterns (Milestone 3):

• Cash vs. Accrual: Compare BilledCost (cash-basis) with EffectiveCost (accrual-basis) to reconcile financial reporting views
• Discount Analysis: Compare ListCost with BilledCost or EffectiveCost to calculate realized savings
• Commitment Coverage: Identify usage covered by prepaid commitments where BilledCost = 0 but EffectiveCost > 0
• Marketplace Scenarios: Within a single provider's dataset, BilledCost and EffectiveCost totals should reconcile over the commitment term. Across providers (e.g., CSP purchase + SaaS usage), aggregations may not match - only the provider with actual usage data should populate EffectiveCost
• Payment Model Variations: Different commitment payment models (all-upfront, no-upfront, partial-upfront) affect when BilledCost and EffectiveCost diverge

Draft Enhancement - Add to Supporting Columns:

• BillingAccountId
• BillingAccountName
• BillingCurrency
• BillingPeriodEnd
• BillingPeriodStart
• ChargePeriodEnd
• ChargePeriodStart
• ServiceName
• ChargeCategory (add - Purchase vs. Usage context)
• CommitmentDiscountId (add - for commitment analysis)
• Publisher (add - for marketplace scenarios)

Enhancement to "Commit Usage and Under Usage" Feature

Current Feature Description:

FOCUS supports the tracking of commitment discounts usage and under usage, which can come in the form of commitment discounts or capacity reservations.

Draft Enhancement - Revised Description:

FOCUS supports the tracking of commitment discounts usage and under usage, which can come in the form of commitment discounts or capacity reservations. The relationship between BilledCost and EffectiveCost varies based on commitment payment models.

Commitment Payment Model Patterns (Milestone 3):

• All-Upfront: Purchase record has BilledCost > 0, usage records have BilledCost = 0 and EffectiveCost distributed across usage
• No-Upfront: Both purchase and usage records have BilledCost > 0; EffectiveCost equals BilledCost (no prepayment to distribute)
• Partial-Upfront: Mixed model where purchase record has partial BilledCost, usage records have remaining BilledCost plus distributed upfront EffectiveCost
• Unused Commitments: CommitmentDiscountStatus = 'Unused' rows have BilledCost = 0 and EffectiveCost representing unused commitment value

Draft Enhancement - No changes to columns (already has BilledCost and EffectiveCost in Supporting Columns)

Enhancement to "Billed Cost and Invoice Alignment" Feature

Current Feature Description:

FOCUS data should be consistent with the costs indicated on payable invoices. This is relevant to the total cost of the invoice, as well as the period of time the invoice covers.

Draft Enhancement - Add to Description:

FOCUS data should be consistent with the costs indicated on payable invoices. This is relevant to the total cost of the invoice, as well as the period of time the invoice covers. BilledCost represents cash-basis accounting aligned with invoice payment obligations, while EffectiveCost represents accrual-basis accounting for financial reporting. Practitioners can reconcile both views for GAAP-compliant reporting.

Draft Enhancement - Add to Directly Dependent Columns:

• BilledCost
• BillingCurrency
• BillingPeriodEnd
• BillingPeriodStart
• InvoiceId
• EffectiveCost (add - for accrual-basis reconciliation)

Comparison: Feature Enhancement Scope

Feature	Current State	Milestone 1 Impact	Milestone 3 Impact
Effective Cost Analysis	Focuses on amortization concept	Clarify accrual-basis purpose	Add payment model scenarios, marketplace guidance
Cost Comparison	Generic cost comparison	Clarify cash vs. accrual comparison	Add cross-provider reconciliation patterns
Commit Usage	Tracks usage/unused status	Minimal changes	Add payment model pattern guidance
Invoice Alignment	Invoice reconciliation only	Add accrual-basis concept	Add financial reporting reconciliation

---

🎯 Desired Outcome / Practitioner Impact

Primary Outcome: Eliminate ambiguity in EffectiveCost and BilledCost definitions, ensuring data generators provide accurate accrual-based cost data that practitioners can use for financial reporting and cost allocation without worrying about data quality issues.

Success Metrics

For Practitioners:

• Can perform accrual-based cost allocation across all providers using EffectiveCost without custom filtering or workarounds
• Can confidently distinguish between accurate usage-based costs vs. scenarios where provider lacks usage information
• Can reconcile cash-basis (BilledCost) and accrual-basis (EffectiveCost) views for financial reporting

For Data Generators:

• Clear conformance requirements eliminate implementation ambiguity
• Reduced customer support burden around EffectiveCost interpretation
• Consistent implementation across providers increases FOCUS interoperability value

For the FOCUS Ecosystem:

• Increased practitioner confidence in FOCUS data accuracy
• Reduced specification interpretation debates in community
• Foundation for future enhancements (correlation columns, coverage indicators)

Practitioner Impact by Persona

FinOps Practitioners:

• Accurate accrual-based chargeback without post-processing
• Clearer understanding of which costs are usage-based vs. purchase-based
• Better marketplace cost allocation (knowing which provider has authoritative data)

Finance/Accounting Teams:

• Can use FOCUS data directly for GAAP-compliant financial reporting
• Clear mapping between cash-basis (BilledCost) and accrual-basis (EffectiveCost) accounting
• Confidence in data accuracy for auditing purposes

Data Engineers:

• Clear rules for when to use BilledCost vs. EffectiveCost in calculations
• Better understanding of data quality indicators (when EffectiveCost is authoritative vs. absent)

Tooling Vendors:

• Can build robust accrual-based cost features without worrying about data quality variations
• Clear conformance requirements enable better validation and quality checks
• Consistent behavior enables cross-provider analytics

---

📨 Type of Request

• Refinement of an existing FOCUS attribute
• Addition of a provider-supported field not yet in FOCUS
• Net-new concept (not currently supported by providers or FOCUS)
• Supporting Content (may require appendix with scenarios and examples)

Note: While this is primarily a refinement/clarification, the changes may constitute in breaking changes from existing provider implementations as we strive to make previously ambiguous requirements explicit.

---

🏛️ Organizations Requesting or Supporting This Feature

• Neos
• Datadog
• AWS
• MagicOrange
• StitcherAI
• Domo
• Broadcom

---

🌐 FinOps Scope Alignment (Optional)

• Public Cloud – AWS, Azure, GCP, etc. (Primary focus)
• SaaS – Salesforce, Snowflake (Marketplace scenarios)
• Data Center
• Licensing (relevant for SaaS licensing scenarios)
• AI (under development)
• Custom (under development)

---

📊 Impacted Parties

• FinOps Practitioner
• FOCUS Data Generator
• Vendor Supporting FOCUS
• Other (please explain in comments)

---

🌫️ Level of Ambiguity

How clearly defined is the request? Rate from 1 to 5:

While the concepts of cash-basis vs. accrual-basis accounting are well understood, this rates as a 3 because:

Reducing complexity:

• Oct 31 meeting achieved conceptual alignment on accuracy vs. double counting framing
• Milestone approach provides clear path through the complexity
• Core accounting concepts are well established (cash vs. accrual)

Remaining complexity:

• Multiple stakeholders with different implementation constraints (CSPs, SaaS providers, MSPs)
• Edge cases around marketplace and commitment scenarios require careful normative language
• Historical baggage from 6 months of contentious discussion requires careful change management

Mitigating factors:

• Extensive sample data and scenarios already documented (Udam's spreadsheet, Irena's PR)
• Clear precedent in accounting standards (GAAP cash vs. accrual)
• Ensuring the Finance perspective is well represented from data generator and practitioner perspective
• Working group has invested significant time understanding the problem space
• Milestone approach allows incremental progress and validation

---

📂 Supporting Documentation

Related Issues

• [WI] Clarify and Refine Effective Cost Column Specification #949
• [FR] Consider revisiting the use of the term "amortization" in the EffectiveCost column and standardize the definition overall of which columns should be amortized #1009
• [FR] Add support for correlating Purchase and Covered Records for Single-Provider Scenarios #1445
• [FR] Add ability to prevent double-counting of costs and quantities #974
• [FR] Add ability to distinguish and correlate vendor and provider marketplace purchases #978
• [FR] Extend support for Contract Commitment dataset #1459
• [FR] Clarify commitment concepts and glossary entries #1070

Key Reference Materials

• Udam's Billed/Effective Cost Metrics Spreadsheet (Sep 2025)
• PR FR #982: Clarify EffectiveCost column semantics across all use cases #1239
• PR FR #982: Clarifying EffectiveCost Definition #1323
• AI [AI] Review scenarios and open questions for EffectiveCost column semantics #1223

Working Group access only

• 982 Effective and Billed Cost Ideation Doc
• 982 EffectiveCost Clarification

Historical Context

This feature request was in 1.3 scope from June-September 2025 but was cut on Sep 28 due to:

1. Fundamental disagreements on partial upfront scenarios
2. Insufficient time to resolve normative language precision
3. Need for more extensive scenario validation

---

🛠️ Proposed Solution / Approach

Could potentially be a breaking change. Will need to flesh this out more.

---

💬 Community Support (Add Your Voice)

If your organization supports this request or has a similar use case:

• Add a comment below including:
  • Your organization
  • A brief explanation of why this is important to you (e.g., use case, urgency)
• FOCUS Staff & Maintainers will aggregate supporting orgs over time.

[rileyjenk]

I believe that this one should be split up. Double count scenarios is very different than the amortization definition clarification.

[Matt-Cowsert]

@rileyjenk We can break this up, that's fine. We also need to add organizational support or we can't prioritize this properly.