“If your contract does not have a kill fee, you do not have a forecast. You have a wish.”
Investors look at one simple thing when they read your service contracts: how fast you convert your time into predictable cash. The market rewards companies that protect that cash with clear terms. A kill fee clause does exactly that. It turns cancellations into revenue instead of write-offs. Without it, your growth model is weaker than your pitch deck suggests.
The pattern is familiar. A SaaS vendor signs a custom integration deal. A dev shop starts a build. A marketing agency begins a multi-channel campaign. Halfway through, the client pauses “for internal reasons” and wants to cancel. Your team already spent weeks on planning, onboarding, and setup. Your margin disappears. Your forecast shifts. Your CAC payback period stretches. You still pay your team, but you do not get paid.
The kill fee clause is the boring legal sentence that changes those numbers. It does not increase top-line revenue out of thin air. It just locks in the value you already created but have not billed yet. That is why serious buyers accept it, and serious investors expect it.
Why kill fees show up in serious deals
In media, consulting, and enterprise software, kill fees have existed for decades. Tech founders tend to learn about them only after a painful cancellation. The logic is simple: once you commit internal resources based on a signed scope, you carry real cost risk. A kill fee shifts that risk back toward the buyer if they pull out early.
“A kill fee is not about punishing a client. It is about paying for sunk cost and reserved capacity.”
The business value sits in three places:
1. Revenue protection for sunk work.
2. Protection of pipeline health and planning.
3. Better client behavior at the negotiation table.
The trend is not clear yet, but I see more early-stage B2B startups adding kill fee clauses once they start selling deals above 20,000 dollars or that require any form of custom work. Once clients ask for custom flows, custom integrations, or dedicated teams, the absence of a kill fee becomes a red flag.
Where kill fees matter most in tech
You see the largest impact in:
– Agencies and studios selling retainers plus projects.
– Dev shops and product studios building v1s or complex features.
– SaaS vendors selling enterprise plans with onboarding or custom work.
– Data, AI, or analytics vendors doing custom models or data pipelines.
In each case, your marginal cost of serving the client in the first 60 to 90 days is higher than your steady-state cost. You front-load effort. The client front-loads less cash. Without contract protection, that gap hits your cash runway.
How a kill fee feeds into your financial model
Finance cares about three questions:
1. How predictable is revenue against booked work.
2. How much gross margin you keep when things go wrong.
3. How cancellations affect runway and hiring plans.
A kill fee clause gives you a lever for each.
CAC payback and kill fees
Marketing and sales spend cash months before deals close. Product work for an enterprise pilot often starts even earlier through “pre-sales engineering” or “discovery workshops.” If a client cancels, your CAC goes up in practice, even if your spreadsheet does not show it yet.
With a kill fee, your worst-case revenue on a cancelled project or pilot covers part of that spend. The numbers shift in your favor.
Example:
– You spend 15,000 dollars to land a 100,000 dollar project.
– You expect 40,000 dollars in revenue in the first quarter.
– The client cancels in week 5 after you already staffed the team.
Without a kill fee, that 15,000 dollars hits your CAC and your loss. With a 25,000 dollar kill fee, you at least cover your sales spend and some labor.
“Investors do not only ask if you grow. They ask how much you lose when a client changes their mind.”
Revenue quality: booked vs. secured
Burning cash to chase “whale” contracts that vanish is a common early-stage story. Your CRM says “commit.” Your bank account says “hope.” Kill fee clauses change the quality of your bookings. When a contract includes a clear kill fee, a signed SOW looks closer to secured revenue than to a risky bet.
That plays into board reporting. Your forecast can show:
– Booked revenue with kill fee protection.
– Booked revenue without kill fee protection.
– Upside pipeline with no protection.
Investors know which line to discount less.
Capacity planning and hiring
Founders usually over-hire after landing a few large projects. Then one project gets delayed or cancelled and suddenly you carry extra headcount with no matching revenue.
A kill fee stabilizes that swing. Even if a major client backs out, you collect part of the expected revenue. You can bridge the bench period or pay for some of the idle time while your sales team fills the gap.
The ROI is simple: lower variance in monthly margin. Less variance reads as higher maturity when you raise your next round. That effect alone justifies stricter contract terms.
What a kill fee clause actually is
In practical terms, a kill fee clause is a short section that defines what happens if the client cancels early for reasons not caused by your breach of contract.
It typically answers four questions:
1. When is a project considered “killed.”
2. How much is owed if the client kills it.
3. How that fee gets calculated.
4. How and when it must be paid.
You do not need complex legal text to start. Your lawyer will add structure, but your job as founder or operator is to set clear economic rules.
Common economic structures
There are three common patterns for kill fees in tech-related work.
| Model | How it works | Best for | Risk to vendor |
|---|---|---|---|
| Flat % of remaining contract | Client pays a fixed percentage of the value left in the agreement at the time of cancellation | Retainers, long-term projects | Medium |
| Tiered by phase | Fee depends on which phase the project is in when killed | Product builds, complex integrations | Lower if phases reflect effort |
| Cost-based + margin | Client covers documented costs to date plus a defined margin | Enterprise, custom work, regulated buyers | Low if tracked well |
Kill fees do not have to be high to work. They just need to be clear enough that a buyer cannot argue their way out of basic cost coverage.
Model 1: Flat percentage of remaining value
This is simple and easy to explain.
Example structure:
– If the client cancels without cause:
– They owe all fees for work completed to date, plus
– 25 percent of the remaining unpaid contract value.
The business logic:
– You get paid for work done.
– You get partial compensation for capacity you reserved and opportunity cost.
Investors like this model because it is easy to plug into projections. Finance can say: “Our worst case on cancellation is 25 percent of remaining value, plus work done.” That sets a floor on expected revenue.
“If you cannot explain your kill fee to a CFO in 30 seconds, it is too complex.”
The downside is that flat percentages sometimes do not capture your true cost curve. Some projects are front-loaded in cost but bill evenly. In those cases, a flat 25 percent might not cover your risk in the early weeks.
Example numbers for flat percentage
Imagine a 200,000 dollar 6-month contract with even monthly billing (33,333 dollars per month). You agree to a 25 percent kill fee on the remaining value.
| Month | Cancelled at end of month | Amount already billed | Remaining contract value | Kill fee (25% of remaining) | Total revenue collected |
|---|---|---|---|---|---|
| 1 | Yes | $33,333 | $166,667 | $41,667 | $75,000 |
| 3 | Yes | $100,000 | $100,000 | $25,000 | $125,000 |
| 5 | Yes | $166,667 | $33,333 | $8,333 | $175,000 |
That 75,000 dollars in month one is the real protection. If your upfront cost in month one is, say, 50,000 dollars, you still keep some margin, even if the project dies.
Model 2: Tiered by phase
Phase-based kill fees often track the real work profile better. You split the engagement into named phases with clear start and end points. Each phase has its own cancellation fee.
Common phases in a tech-style project:
– Discovery and planning.
– Design and architecture.
– Build and implementation.
– Testing and refinement.
– Launch and early support.
You assign a percentage to each phase based on how much prep and overhead you commit before visible output appears.
Example:
– Cancellation during discovery: 50 percent of remaining contract value.
– During design and architecture: 35 percent.
– During build: 25 percent.
– During testing: 15 percent.
– During support: 0 to 10 percent.
This looks more complex, but for buyers it often feels fair. They see that the earliest phase carries more risk for you.
Phase-based example table
Assume a 120,000 dollar project broken into 4 equal billing phases of 30,000 dollars. You set the following kill fee percentages on remaining value:
– Discovery: 50 percent
– Design: 35 percent
– Build: 20 percent
– Launch: 10 percent
| Phase at cancellation | Billing completed | Remaining value | Kill fee % | Kill fee amount | Total revenue collected |
|---|---|---|---|---|---|
| Discovery | $0 | $120,000 | 50% | $60,000 | $60,000 |
| Design | $30,000 | $90,000 | 35% | $31,500 | $61,500 |
| Build | $60,000 | $60,000 | 20% | $12,000 | $72,000 |
| Launch | $90,000 | $30,000 | 10% | $3,000 | $93,000 |
The numbers here show why investors like clear phase gates. You have real protection in earlier phases. By the time you hit launch, most of your cost has already been covered by regular billing.
Model 3: Cost-based plus margin
Some procurement teams prefer a “cost plus” framing. In that model, if the project is killed, the client agrees to pay:
– All documented direct costs related to the project, plus
– A stated margin (often 10 to 30 percent) on those costs.
Direct costs might include:
– Salaries and benefits for team members dedicated to the project (pro-rated).
– Contractor invoices.
– Specific tool licenses or cloud spend bought for the client.
– Travel or other direct expenses.
The margin covers overhead and profit you would have earned if the project continued.
This model requires better internal tracking. You need clean time tracking and cost allocation. If you run a product studio, dev shop, or consulting unit with strong internal cost accounting, this aligns with how your finance team already thinks.
Negotiation tradeoffs with cost-based models
Buyers sometimes push for cost-based kill fees because it sounds more “fair.” The tradeoff for you:
– You gain flexibility with high-variance projects where scope might move.
– You lose some predictability, because the final fee depends on your cost tracking.
From a growth point of view, cost-based kill fees work better if:
– You have more than 10 to 15 active projects.
– You want detailed margin analysis by client.
– You have a finance person who can stand behind those numbers in a dispute.
The clause: how to phrase it in plain terms
Lawyers will always refine wording, but you can start with clear commercial language. Here is a simple structure you can ask counsel to convert to legal text:
– Define “termination for convenience” by the client. That is the legal phrase often used for “they cancel early without your breach.”
– State the client’s obligation to pay for work performed through the date of termination.
– Add the kill fee amount or formula.
– Clarify timing of payment and invoicing.
Example in plain business language:
“If Client terminates this Agreement or any Statement of Work for convenience, Client will pay (a) all fees for Services performed and expenses incurred through the effective date of termination, and (b) a cancellation fee equal to twenty-five percent (25%) of the unpaid fees that would have become due under the applicable Statement of Work.”
For a phase-based structure, you can phrase it like:
“If Client terminates for convenience, Client will pay all fees and expenses incurred through the effective date of termination, plus the applicable cancellation fee shown in the Schedule, based on the project phase in effect as of the termination date.”
Your contract schedule would then include a simple table of phases and percentages. That matters for clarity. It is easier to negotiate with a visible table than with dense legal text hidden in the middle of a paragraph.
Where to place the kill fee in your documents
There are two common placements:
1. In the Master Service Agreement (MSA) under “Termination.”
2. In each Statement of Work (SOW) under “Commercial Terms” or “Fees.”
If your business model is stable, placing a standard kill fee rule in the MSA creates uniformity. You then only tweak percentages per SOW when needed.
If each client is very different, or if you sell different service tiers, you can vary kill fees by SOW. For example:
– Standard onboarding: 20 percent kill fee.
– Premium onboarding: 35 percent kill fee.
– Custom integration: 50 percent kill fee during discovery, then 25 percent.
From a revenue operations point of view, it helps to define a default pattern. Sales teams then know what they can offer without legal review.
How kill fees change client behavior
Founders worry that adding a kill fee scares clients. In practice, two things tend to happen:
– Tire-kickers drop out earlier in the sales process.
– Serious buyers accept the clause, sometimes after a small adjustment.
Clients that plan to treat your team as “just a test” resist kill fees. That is a helpful filter. Your close rate might drop a bit, but your lifetime value per client usually rises.
“A kill fee clause filters out buyers who view your time as disposable.”
Kill fees also reduce random “pauses.” If stopping the project means writing an extra check, internal sponsors fight harder to keep it alive. That alone protects your revenue.
Objections you will hear
Here are common pushbacks and grounded ways to handle them.
1. “Our policy does not allow kill fees.”
You can reply:
– “We can reduce the percentage, but we cannot remove it. Our team reserves capacity for your project, and this clause only covers that cost.”
2. “We need full flexibility to stop the project at any time.”
Reply:
– “You have that flexibility. The kill fee simply means the company pays for committed resources. It is standard for work like this. We are happy to show how we arrived at the number.”
3. “This is not in other vendors’ contracts.”
Reply:
– “Different vendors price risk differently. We could raise the base fee and remove the kill fee, but that would cost more upfront. The current model keeps your initial outlay lower.”
You are not just defending a clause. You are explaining your pricing logic. That builds trust with buyers and makes you look more mature as a vendor.
Kill fees vs. non-refundable deposits
Some tech services teams rely on deposits instead of kill fees. A deposit is simple: the client pays a portion of the project cost up front, often non-refundable. When the project cancels, you keep that deposit.
Kill fees and deposits can work together:
– A deposit covers very early risk before work starts.
– A kill fee covers later risk after work begins.
Example combination:
– 20 percent upfront non-refundable deposit.
– Standard billing schedule over project life.
– 25 percent kill fee on remaining value if cancelled after kickoff.
This blend results in stronger cash protection. The tradeoff is more pressure in early negotiation. For early-stage startups still trying to land their first reference clients, this might feel heavy. Still, for later-stage or profitable teams, pairing a modest deposit with a clear kill fee can stabilize cash flow across the year.
Kill fees and subscription SaaS
If your business is mostly self-serve SaaS, a kill fee feels out of place. Month-to-month credit card subscriptions already contain their own kind of flexibility.
The moment you add the following, though, kill fees start to make sense:
– Long-term term commitments (annual or multi-year).
– Discounted pricing for term commitments.
– Custom onboarding services.
– Dedicated account managers or success teams.
– Custom development around your API.
For SaaS companies, kill fee ideas show up as:
– Early termination fees on term contracts.
– Non-cancellable onboarding fees.
– Fixed minimums for resource commitments.
Example for a SaaS with custom onboarding:
– You sell an annual plan at 60,000 dollars per year.
– Onboarding and configuration is 15,000 dollars.
– You give a 10 percent discount if they pay annually upfront.
Your contract might say:
– Onboarding fees are non-refundable once work begins.
– If the client terminates early without cause, they owe 50 percent of remaining annual fees.
From a growth point of view, that second part behaves like a kill fee. It protects the annual value you discounted for.
How this looks in pricing tables
Sales pages should not mention “kill fees.” That belongs in contracts. Still, your internal pricing model should reflect the economics.
Example snapshot:
| Plan | Base annual fee | Onboarding fee | Discount for annual prepay | Early termination fee |
|---|---|---|---|---|
| Growth | $24,000 | $3,000 | 10% | 20% of remaining term |
| Scale | $60,000 | $10,000 | 15% | 35% of remaining term |
| Enterprise | $150,000 | $25,000 | 20% | 50% of remaining term |
The jump in termination fee percentage as you go up tiers reflects your increased investment: more support, more integration, more internal cost. Investors read those numbers as signs that you understand your own unit economics.
Kill fees, churn, and investor due diligence
During a funding round, investors ask not just “What is your churn?” but “What happens when a client churns?” They want to know whether a cancellation wipes out profit or just trims long-term upside.
Kill fees change that story.
If 20 percent of your project pipeline cancels each year but every cancellation still produces some revenue because of kill fees, your gross margin stays healthier. The investor conversation shifts from fear about volatility to questions about upsell strategy.
“Churn without a kill fee hits your P&L. Churn with a kill fee mostly hits your growth rate.”
In a due diligence call, a strong answer sounds like this:
– “For all project work, we have a 25 percent minimum kill fee on remaining value. Last year, 11 percent of project bookings were cancelled early, but we recovered about 60 percent of the planned revenue from those deals through kill fees and work-in-progress billing.”
That level of detail calms fears about reliance on a small number of large clients.
Internal process: making kill fees real, not just text
Putting a clause in a contract is not enough. Your internal process has to support it. Otherwise, when a client cancels, your team will forget or hesitate to enforce it.
Key internal habits:
– Sales must explain the clause during negotiations, not hide it.
– Account managers must flag risk of cancellation early.
– Finance must instantly calculate the correct kill fee based on the contract.
– Leadership must back the team when a client pushes back.
From a growth point of view, weak enforcement means you price risk as if a kill fee exists, but you do not collect it when it matters. That gap can be large.
Playbook for handling a cancellation
When a client wants to cancel, your team can follow a simple script:
1. Acknowledge the request and set a short meeting.
2. In that meeting, explore whether scope change or pause is better than full termination.
3. If they confirm termination, explain the contractual process:
– Fees for work completed to date.
– Kill fee amount.
– Handover of work product.
4. Send a clear summary email with numbers.
5. Issue the invoice with reference to the relevant contract clause.
This approach keeps the tone businesslike. Clients respect vendors who treat cancellations as standard commercial events, not personal failures.
How to introduce kill fees if you never had them
If your current contracts do not include kill fees, you can phase them in without shocking your client base.
Two practical approaches:
1. Apply kill fees to new clients first. Treat legacy contracts as they are, and begin the new rule on all new agreements.
2. For renewals, pair the kill fee addition with something the client wants:
– A longer discount.
– Priority support.
– Slightly better payment terms.
You do not frame it as “We added a penalty.” You frame it as “We adjusted our terms to reflect how we schedule and reserve capacity for your projects.”
If you already have a solid client relationship and you consistently deliver, most B2B buyers accept that logic.
Kill fees, reputation, and long-term value
Founders sometimes fear that enforcing kill fees will hurt referrals or reviews. In practice, your reputation depends more on how you behave than on whether a clause exists.
Clients talk when:
– The vendor surprises them with hidden charges.
– The vendor acts rigidly during a crisis.
– The vendor refuses to negotiate at all.
Kill fees do not force you to collect the full amount every time. They give you a ceiling from which you can come down.
For instance:
– The contract says 30 percent of remaining value.
– The client has a legitimate external crisis and wants to cancel.
– You can agree to collect 15 percent and frame the other 15 percent as a goodwill credit for future work.
From a numbers view, you still collect more than zero. From a relationship view, you look flexible and fair. From an investor view, you still have a hard rule in place and a conscious decision to soften it when justified.
Closing the loop: why your next contract needs a kill fee
When you zoom out, the kill fee clause is not just legal boilerplate. It is a concrete tool that:
– Raises the floor on your revenue per project.
– Stabilizes your margin against cancellation risk.
– Filters buyers toward those who value your time.
– Strengthens your story during funding conversations.
You would not ship code to production without logging and error handling. Similarly, shipping service work without a kill fee clause leaves your business blind to a predictable kind of risk.
The trend is not clear yet, but more founders treat their contracts as part of their growth engine, not just legal paperwork. The kill fee clause sits near the top of that list. Add it, test it, and watch how your forecast and your investor calls start to feel more grounded.