Key Takeaways

• Contracted ARR counts signed contracts. ARR counts live ones. The gap between them is revenue you've won and haven't started delivering.

• A company with $1.2M live and $300K signed but not started reports $1.5M contracted ARR.

• Usage overage above the commitment sits outside contracted ARR, so a business on $1.5M of contracted ARR can be earning $1.38M today and $1.68M once the signed contract starts.

• Contracted ARR is a forward-looking commitment number and never equals recognized revenue for any period.

• Ramped contracts break the naive calculation, because year one and year three carry different annual values.

How is contracted ARR calculated?

Take every signed contract, annualize its recurring value, and sum them. The two decisions that change the answer are whether you count contracts that haven't started and how you treat contracts shorter or longer than a year.

The calculation, step by step:

1. List every contract with a signature, including future start dates and excluding anything still in negotiation.

2. Annualize each one: a $2,000 monthly contract counts as $24,000, a three-year $360,000 contract counts as $120,000.

3. Exclude one-time fees, implementation charges, and professional services, which aren't recurring.

4. Exclude usage above the committed amount, which isn't contracted.

5. Sum the result.

Step 2 is where ramped contracts cause trouble. A contract that charges $80,000 in year one, $120,000 in year two, and $160,000 in year three has no single annual value. The convention most finance teams use is the current contract year's value, restated as the ramp steps up, which keeps contracted ARR consistent with what the customer will actually be invoiced over the next twelve months.

Does contracted ARR include usage overage?

No, and that exclusion is the single biggest reason contracted ARR misrepresents a usage-based business. Overage isn't contracted, so it can't be in a contracted number, even when it recurs reliably every month.

A bridge from contracted ARR to the real revenue rate:

Contracted ARR sits between two real numbers and equals neither. That $180,000 of overage is repeating revenue outside the headline metric, while the $300,000 inside it isn't earning yet. In an AI product where consumption grows faster than commitments get renegotiated, the excluded portion keeps growing, and a board tracking only contracted ARR will conclude growth has stalled while revenue climbs.

The two disciplines that keep this honest:

• Report contracted ARR and consumption revenue as separate lines rather than blending them into one ARR figure.

• Convert proven overage into a higher commitment at renewal, which moves the revenue into contracted ARR where it's defensible. How billing system affects saas revenue covers the reporting side.

Why does contracted ARR disagree with recognized revenue?

They measure different things over different windows, so they should disagree. Contracted ARR is a forward-looking annualized commitment at a point in time. Recognized revenue is what you actually earned in a closed period.

The specific sources of divergence:

• Future start dates. A contract signed in March and starting in July contributes to contracted ARR immediately and to revenue in July.

• Annualization. A one-month pilot worth $5,000 counts as $60,000 of contracted ARR and $5,000 of revenue.

• Usage. Overage lands in revenue and never in contracted ARR.

• Timing of delivery. Revenue recognition follows delivery under accrual accounting, while contracted ARR follows signature.

• Errors. Anything metered but never invoiced shows up as revenue leakage, reducing recognized revenue while contracted ARR stays untouched.

What the metric should look like at each stage of growth is laid out in saas billing at every mrr stage. That last one is worth watching, because contracted ARR is the metric least sensitive to billing failures. If your reported revenue keeps landing below what contracted ARR plus expected consumption predicts, the gap is usually a reconciliation problem rather than a demand problem.

Related terms

These terms explain the parts of revenue that contracted ARR either annualizes or leaves out.

• Consumption-based pricing is the model that creates revenue outside the contracted floor.

• Revenue leakage is earned revenue that never reaches an invoice, invisible to contracted ARR.

• Usage reconciliation is the check that explains a gap between expected and recognized revenue.

• Rated usage is the priced consumption that sits above the commitment.

• Billing in arrears explains why consumption revenue always lands a period behind the contract.

FAQ

Is contracted ARR the same as bookings?

No. Bookings measure the total value signed in a period, usually including one-time fees and the full multi-year contract value. Contracted ARR is a point-in-time balance of annualized recurring value across the whole book, so a quarter with zero new bookings still has a contracted ARR.

What's the difference between ARR and contracted ARR?

ARR counts recurring revenue from contracts that are live and being invoiced today. Contracted ARR adds contracts that are signed but haven't started. In a company closing new business, contracted ARR is always the larger number, and the difference is the backlog waiting to go live.

Does contracted ARR include contracts that are about to churn?

Yes, until they actually terminate. A customer who has given notice but whose contract runs another four months still counts. Most teams track that separately as committed churn, because contracted ARR on its own gives no warning.

Should a usage-based business report contracted ARR at all?

Yes, as one line of two. Contracted ARR tells investors what's committed, and it materially understates a business where consumption exceeds commitments. Reporting it alongside consumption revenue avoids both the overstatement of blending them and the understatement of showing only the contracted figure.