Pro rata: Overview, definition and example
What is pro rata?
Pro rata is a method used to divide or distribute something (like costs, profits, or time) in proportion to a specific factor, such as usage or time. It’s often used when a full amount or value needs to be adjusted based on the actual portion or share involved. For example, if someone uses a service for part of a period rather than the entire period, they might only pay for the part they used, rather than the full price.
Why is pro rata important?
Pro rata is important because it ensures that resources, costs, or benefits are allocated fairly. It helps businesses adjust payments or obligations based on actual usage or time, rather than requiring one party to pay for the full amount when they haven’t fully used it. This keeps transactions fair and reasonable, particularly in contracts involving services or subscriptions.
Understanding pro rata through an example
Imagine a business rents office space for $1,200 a month. If they decide to rent for only 15 days in a month, instead of paying the full $1,200, they would pay pro-rata. If the rent is charged on a monthly basis, the pro-rata amount would be $600, as they used half the month.
Another example is a subscription service for a product, which charges $120 annually. If a customer subscribes for only six months, they would pay $60, calculated pro-rata for the six months of use.
Example of a pro-rata clause
Here’s how a pro-rata clause might look in a contract:
“The amount due for the service will be calculated on a pro-rata basis, based on the number of days the service is provided within the billing period.”
Conclusion
Pro rata is a simple yet effective way to ensure fairness when dividing costs, benefits, or obligations based on actual usage or time. By applying pro-rata, businesses can ensure that payments reflect the portion of service or goods used, leading to fairer transactions for all parties involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.