If having unbilled receivables is a new concept based on your experience with other software systems, you may find it a relief that having an unbilled balance is not necessarily bad or wrong. Unbilled Receivables is the offsetting account for billing and revenue postings in Deltek Costpoint. When a billing is posted, the Billed Receivables account is debited, and Unbilled Receivables account is credited. For the revenue posting, the Unbilled Receivables account is debited and Revenue account credited. Hence, if the billing and revenue posting amounts are the same, the offsetting Unbilled Receivables account will be zero. That sounds great, however, there may be situations where billing and revenue do not or should not match, which then creates a balance in the Unbilled Receivables account. So, when is it okay to see an Unbilled Receivables balance?
Different Billing and Revenue Calculations Used
For example, the company has a $240,000 fixed priced services contract with a period of performance (POP) of October 2020 through September 2021. Each month the company invoices $20,000 to the customer. The labor hours being charged will vary over the life of the contract with an expected build-up of hours over the first several months. Hence, in FY20 (Jan-Dec), the contract is likely to show a higher profit percentage than it would in FY21 (Jan-Dec) if revenue and billing amounts were the same. To more accurately compute profit, the company may decide to use a Cost Plus Fee on Cost revenue formula with a fee percentage equal to the proposed contract profit. As such, the offsetting billing and revenue amounts posted each month to the unbilled receivable account will not be equal and therefore a balance will reside in the account for that project until the contract is closed out.
Open Billing Detail Transactions Placed on Hold
Billing items may be placed on hold for various reasons. If the billing and revenue formulas are the same (e.g. Cost Plus Fee on Cost) and the cost of an Open Billing Detail transaction is placed on hold, revenue can still be recognized on all costs incurred, barring an adjustment entry. This is a typical practice when on-hold items are pending a clarification, correction, or funding.
Timing Difference
When using a transaction-based revenue formula and the cut-off of transaction postings are not tightly controlled prior to invoice calculations, a potential for additional transactions to be recorded exists. Revenue is typically recorded during the month end closing processes and therefore could include costs not billed.
Retainage
Some contracts require a retainage of fee, T&M labor or total billable dollars as a safeguard to the customer. As such, unbilled retainage would exist and build over time until it becomes billable.
Funding Limitations
When contract incurred costs exceed incremental funding, excess cost over the funding value is deducted from the total allowable billing amount. With additional funds anticipated, revenue is often recognized on all the incurred hours/costs up to the total value of the contract. With the delay of invoicing unfunded costs, an unbilled receivables value will exist.
Provisional vs. Target or Actual Rates
In Costpoint, provisional indirect rates are always used for billing calculations. Revenue can be recorded based on target or actual indirect rates. Most often, target and provisional indirect rates are the same. At the end of the fiscal year, it is common for companies to record revenue based on actual indirect rates. Adjustment billings, known as Retroactive Billings in Costpoint, are then generated after an independent audit has been conducted and year-end adjustment entries posted. Indirect cost pool rate variances are commonly seen in unbilled receivables after year end.
The examples above provide various reasons for having unbilled balances and as such, the unbilled balance on any given project may be one or more of the reasons listed. Reconciling the balances in the unbilled receivables account monthly is optimal for several reasons, and speaking from my own experience, greatly recommended as a monthly priority.
Accountants wear a lot of different hats including the processing of numerous transactions, proposal pricing, new contract setup and tracking, close-outs, audits, personnel matters, and the occasional well-deserved vacation. Because of the frequent changes from one task to another, it is easy to lose track or forget details. The reconciliation amounts are much easier to identify when they are the result of situations that arose within one accounting period versus the accumulation of various amounts and situations over multiple periods. In addition, errors are sometimes found and correcting them in a timely manner is best. It promotes confidence with reported data and assists in keeping the company audit ready.
Having worked with Costpoint for many years, the reconciliation of Unbilled Receivables is a favorite pet project of mine. Please contact Redstone Government Consulting, Inc. if in need of help with the reconciliation and clean-up of your Unbilled Receivables Report.
