Eight types of contracts

Most consultancies use the time and material contract as their primary method of invoicing. Usually, invoices are issued once a month, listing the amount of time spent on a given project.

If the consultancy is project-oriented, or if they sell products instead of hours, the settlement method often moves toward a fixed-price contract, possibly based on a payment plan in accordance with the major deliveries of a project or task.

Lastly, there are many companies employing what you might call "periodic invoicing". These are typically auditors, accountants and companies offering standard services and invoicing customers at standard amounts (on-account or fixed-price) on a monthly, quarterly or annual basis. These consultancies can benefit from partially automated invoicing systems and periodic rather than shipment-based budgeting.

For these types of businesses, the usual challenge of managing contracts and finances is that 90% of business follows fixed contract principles in a catch-all system, but the remaining 10% differ due to special agreements, new product areas or creative negotiations. This scenario is made even more challenging for companies mixing time and material, fixed-price assignments and periodic business.

For the sake of simplicity, let us group consultancy contracts in eight main types (four based on time and material on four on fixed prices).

• Time and material
  o Ongoing invoicing
  o On-account invoicing with end-balancing
  o On account invoicing with periodic balancing (ongoing contracts)
  o Prepaid hours

• Fixed price
  o Invoicing based on a payment plan with per-project revenue recognition
  o Invoicing based on a payment plan with per-task revenue recognition
  o Continuous service (ongoing contract)
  o Volume invoicing (ongoing contract)

Each main type holds anomalies, for example time and material at maximum budget and special rules for revenue recognition at a fixed price.