Title: What is the best practice for Cost Plus contracts so that at the end of the year my Revenue matches my Billings?
Cost Plus type contracts are typically billed at the provisional rates, which is the estimated rate submitted to an external agency such as DCMA. Provisional rates can be based on the prior year's actual rates with management's best estimate for any increases or decreases projected within the new year. As a year progresses, companies will monitor their rates throughout the year and may resubmit their provisional rates if there are significant changes that will affect whether they are undercharging or overcharging rates applied to their cost plus billing.
There is typically a difference between Billings and Revenue at the end of the year due to the differences between the provisional and actual rates. From an accounting reporting perspective, this is expected and corrected since actual rates are often unknown until after the year end close. This may depend on how quickly you can get the actual costs in the system (i.e., expenses, vendor invoices etc.) In order to not hold up billing, you might issue a twelfth invoice at the same indirect rate (assuming monthly invoicing), and then follow up with an invoice (or credit memo) based on calculated actual rates as soon as you have the data to do that calculation.
What’s covered in this document:
Options for End of Year True-Up
If there is a need to match Billing and Revenue within Unanet at year end, it is recommended best practice to facilitate this through either of the options below:
- If the actual costs are calculated in time to apply to the final invoice, then the Cost Structure Rate you have elected to bill on (whether Target/Actual/Provisional) should be edited to reflect the Actual rate. This would pick up all the true-up amounts for billing upon posting.
- If the actual costs are not calculated in time to apply to the final invoice, then the final invoice of the year would be calculated based on the same rates you had elected to bill on (whether Target/Actual/Provisional), with a Journal Entry handling the difference. The journal entry would then be reversed in the new year when either an offset can be made against any amounts due or when a "catch up bill" can be generated.
We do not recommend changing any billing post options in the Admin > Setup > Posting Options screen for the final invoice.
When Provisional Rates are greater than Actual Rates
If the provisional rates are higher than the actual rates, there will be Deferred Revenue (a liability). This value can be found on the Billing and Revenue Summary report in the Deferred Revenue column. Usually, government contractors will apply that difference, or the "amount owed" to the customer, to the next invoice. The amount is then offset against any amounts due on the current invoice, providing the customer with a net amount due.
Example: Billing at the provisional rate yielded $650,000 in Accounts Receivable (billed), but the revenue recognized at the actual rate is $625,000. A $25,000 journal entry would be needed to bring down the Accounts Receivable balance to tie to Revenue recognized at the actual rate:
When Provisional Rates are less than Actual Rates
Conversely, if the provisional rates are lower than the actual rates, there will be a debit to Deferred Revenue. Government contractors will then create a "catch up" invoice to bill their customer for the rate differences, either at year end or as soon as they can calculate their actual rates for the year.
Example: Billing at the provisional rate yielded $625,000 in Accounts Receivable (billed) and $25,000 in positive Deferred Revenue, and the revenue recognized at the actual rate is $650,000.
There are no adjusting entries required as total of Accounts Receivable (Billed and Deferred Revenue) is equal to the total Revenue.
|Accounts Receivable - Billed||625,000|