Revenue, WIP and over or under billing
You will be able to: Name the four revenue methods; Compute earned revenue and over or under billing on the cost basis; Explain the loss provision on a loss-making contract.
- Read not done yet
- Self-check: not taken not done yet
- Lesson complete not done yet
Each project has a revenue method, fixed once bills or revenue runs exist. A is billing-based: revenue follows the progress bills. B is percent of completion, with the percentage taken on cost, physical progress or milestones. C is straight line, through deferral schedules. D is point in time: costs are capitalised to contract work in progress and released when the final bill is invoiced.
Method B on the cost basis needs an approved estimate at completion, or the budget as the chosen source. Without one the run is refused, because an unapproved forecast cannot drive revenue. The run is monthly: revenue to date is the contract value times cost to date divided by EAC, never more than the contract value; this period's revenue is that less what was recognised before.
Over and under billing
Over or under billing is billed to date less earned to date, using the gross certified of the invoiced bills. If billed is 450,000 against earned 400,000, the project is over-billed by 50,000: the client has paid for work not yet done, a contract liability. If billed is 330,000, it is under-billed by 70,000: work done and not yet billed, a contract asset. The two are never netted across projects. The WIP snapshot also stores the retention held and the advance balance left.
The loss provision
When the loss provision is on, a contract whose EAC passes its value gets a provision. With contract value 1,000,000, EAC 1,100,000 and cost to date 440,000: earned is 1,000,000 x 440,000 / 1,100,000 = 400,000, so 40,000 of the loss is already in the numbers (cost less earned). The expected loss is 100,000, so the provision is 100,000 - 40,000 = 60,000. It moves as the EAC and cost change.
- Method A and C earn what is billed; D earns nothing until the final bill.
- Changing method after bills exist is refused. The only restatement supported is A to B, with a reason.
- The run posts a journal tagged to the project; the WIP snapshot is written at the same time.
Walk it through
- Compute earned revenue for a project with a contract value and EAC of your own.
- State whether it is over- or under-billed and by how much.
- In the demo, open the WIP and revenue tab of the Finance Hub.
Public demo company, sign in as admin / demoAdmin123. Data refreshes nightly.
- Four methods: A billing, B percent of completion, C straight line, D point in time.
- Earned (B, cost) = contract value x cost / EAC; over or under = billed - earned.
- Provision = expected loss less loss already in the numbers.
Check yourself
4 questions on this lesson. Not timed, not the exam, and you can try again. Score 60% or more, and read the lesson, to complete it.