Contract research organisation revenue

Contract research organisations run much of the world's clinical research, from recruiting patients to analysing data, under multi-year contracts that change constantly as trials evolve. Their revenue follows IFRS 15's over time rules, but with industry-specific questions: what to count as progress, whether reimbursed costs are revenue, and how to handle scope changes and cancellations. This guide works through a Phase III trial contract and covers each of those questions.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Contract research organisation revenue, from running clinical trials for drug sponsors, is usually recognised over time under IFRS 15, because the sponsor receives the benefit as the work is done and the CRO has a right to payment for work performed if the sponsor cancels. Most CROs measure progress with costs incurred on their own services. The key judgements are whether pass-through costs, such as investigator fees paid to hospitals, are revenue, which depends on whether the CRO is principal or agent for them, and how frequent change orders are accounted for. In this guide's example, a CRO that has incurred a third of its service costs on a US$ 60 million trial recognises 20 million of service revenue, plus 6 million of pass-through revenue if it is principal for those costs.

At a glance

Recognition
Over time, as services are performed
Measure of progress
Usually cost-to-cost on services
Pass-through costs
Revenue if principal
Change orders
Modifications, often catch-up
Cancellation
Right to payment for work done
Balances
Contract assets and liabilities
Contract research organisation revenueRecognition: Over time, as services are performed; Measure of progress: Usually cost-to-cost on services; Pass-through costs: Revenue if principal; Change orders: Modifications, often catch-up; Cancellation: Right to payment for work done; Balances: Contract assets and liabilities.KEY FACTS AT A GLANCEContract research organisation revenueRecognitionOver time, as servicesare performedMeasure of progressUsually cost-to-cost onservicesPass-through costsRevenue if principalChange ordersModifications, oftencatch-upCancellationRight to payment for workdoneBalancesContract assets andliabilitiesTax BakersContract research organisation revenueRecognition: Over time, as services are performed; Measure of progress: Usually cost-to-cost on services; Pass-through costs: Revenue if principal; Change orders: Modifications, often catch-up; Cancellation: Right to payment for work done; Balances: Contract assets and liabilities.KEY FACTS AT A GLANCEContract research organisationrevenueRecognitionOver time, as services are performedMeasure of progressUsually cost-to-cost on servicesPass-through costsRevenue if principalChange ordersModifications, often catch-upCancellationRight to payment for work doneBalancesContract assets and liabilitiesTax Bakers
Key facts at a glance, as set out in this guide.

Why is CRO revenue recognised over time?

A CRO's services, such as site management, monitoring and data management, are consumed by the sponsor as they are performed, and the results belong to the sponsor. Contracts usually entitle the CRO to payment for work done if the sponsor cancels the trial, plus wind-down costs. Either way, the services meet IFRS 15's criteria for recognition over time. A trial contract is usually a single performance obligation, an integrated service to run the study, or a series of distinct daily services. See over time or point in time.

Contract research organisation revenue: a Phase III trial

A CRO agrees to run a three-year Phase III trial for a fee of US$ 60 million for its own services, with expected service costs of 45 million. It will also pay investigator fees to hospitals of 30 million, reimbursed by the sponsor at cost. In year 1, it incurs 15 million of service costs and pays 6 million of investigator fees.

Investigator fees: gross or net?Investigator fees: gross or net?TOPICPrincipalAgentSelects the sitesCROSponsorResponsible for sitesCROSponsorRevenueGrossNetProgress measureService costsService costs
Control of the third-party services decides the presentation.
Year 1, US$ millionCRO is principal for investigator feesCRO is agent for investigator fees
Service revenue: 33% x 602020
Pass-through revenue6None
Costs(21)(15)
Profit55

Progress is measured on service costs only, because investigator fees do not reflect the CRO's own performance and would distort the measure. Profit is the same either way, but revenue is 6 million higher if the CRO is principal for the fees.

Is the CRO principal or agent for pass-through costs?

It depends on whether the CRO controls the services provided by investigators and other third parties before they are transferred to the sponsor. Indicators that it does include that it selects and contracts with the sites, is responsible for their performance and integrates their work into its overall service. Many CROs conclude they are principal for most investigator fees and other reimbursable costs and present them gross, but contracts where the sponsor selects the sites and the CRO simply processes payments point to agency. See IFRS 15 principal vs agent.

How do CROs measure progress?

Most use a cost-to-cost input method on their own direct costs, because the effort to run a trial is uneven: heavy during start-up and enrolment, lighter during follow-up. Some use output measures, such as patients enrolled or visits completed, where these depict the transfer of services better. Estimates of total costs are updated regularly, and changes are recognised as cumulative catch-up adjustments. See the cost-to-cost method.

How are change orders accounted for?

Trials change often: more sites, more patients, longer follow-up. A change order that adds work not distinct from the existing services is a contract modification accounted for as part of the existing contract, with a cumulative catch-up to revenue. Work performed before a change order is formally signed is included in the transaction price only if the CRO has an enforceable right to be paid for it, and variable amounts are constrained until highly probable.

What balances arise?

Services performed ahead of billing milestones create contract assets, often called unbilled services; billing or upfront payments ahead of performance create contract liabilities, often called customer advances. Investigator advances paid on the sponsor's behalf may be receivables. Costs to win contracts, such as sales commissions, are capitalised if incremental and recoverable; proposal costs incurred whether or not the contract is won are expensed. See pharma accounting and contract costs.

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Questions people ask

Is CRO revenue recognised over time?

Usually yes: the sponsor receives the benefit as services are performed, and the CRO is typically entitled to payment for work done if the trial is cancelled.

Are investigator fees included in a CRO's revenue?

If the CRO is principal for them, controlling the investigators' services before they reach the sponsor, they are presented gross as revenue; otherwise net.

How do CROs measure progress on trial contracts?

Usually with a cost-to-cost method on their own service costs, excluding pass-through costs that do not reflect their performance.

How are change orders accounted for?

Usually as modifications of the existing contract, with a cumulative catch-up adjustment to revenue.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 8, 2026, confirm the figures with the source before you rely on them.

PharmaPharma accounting: the key IFRS issuesIFRS 15Principal or agent: gross or net revenue under IFRS 15IFRS 15Revenue over time or at a point in time under IFRS 15

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