Value calculation models for fixed price projects

Introduction

When you sell services at fixed prices, there is not always a correlation between the time of invoicing and the time when the work is performed. Due to this, it is a challenge to calculate the monthly revenue per customer, project, employee or the total amount, since the amount invoiced for a month does not necessarily correspond to the work that was done.

Description

TimeLog automatically calculates the produced revenue based on fixed-price contracts based on budgets, payments, tracked time and registered expenses.

The formula is:
Produced revenue = The contract’s completion rate * the sum of the contract's payment plan

You can configure how TimeLog should calculate the completion rate and revenue from work on fixed-price projects here. Please note that the settings on this page only relate to value calculations on Work (h). Value calculations on external costs on fixed-price contracts are managed on the single contracts.

Please note: TimeLog also automatically makes an assessment of produced revenue from expenses and travels. This is not configured on this page, but on the single contracts.

Calculation of the completion rate

The contract's completion rate in percentage is the point of departure for the calculation of the produced revenue on fixed-price contracts.
The completion rate on work (hours) may either be calculated based on registered hours or registered value of registered hours (see detailed explanation below).

Based on registered hours

If TimeLog is set to calculate the completion rate based on registered hours, the following formula is used for the calculation:

Completion rate = Registered hours / Budget, hours (contract budget)

An example: 

Budget, hours:      100
Registered hours:   10
Completion rate:   10/100 = 10%

 

This model is the most simple and is recommended for companies that do not wish to measure and possibly pay commission salary to employees based on a personal revenue, since the model does not take into account if employees have a higher hourly rate in the project than others.

Based on value of registered hours

If TimeLog is set to calculate the completion rate based on the value of registered hours, the following formula is used for the calculation:

Completion rate, hours = Value of registered hours / Budgeted amount (contract budget)

An example:

 

Budget, amount:       100,000
Value of registered hours   5 hours at 1,000 = 5,000
    5 hours at 500 = 2,500
Completion rate:    (5,000 + 2,500) / 100,000 = 7,5%

 

This model is recommended for companies that would like to measure and possibly pay commission salary to employees based on a personal revenue, since the model takes into account if employees have a higher customer hourly rate than others (e.g. senior consultant vs junior consultant).

Balancing method

TimeLog supports continuous revenue recognition (booking) of value on fixed-price projects. Without the add-on module Revenue recognition, the revenue recognition/booking of revenue is automatically made on the project when:

  • An accounting period is closed for invoicing
  • A contract is marked as Completed or Archived

With Revenue recognition, the user generates vouchers and can freely adjust the revenue suggestions from TimeLog, including the detailed distribution on the single consultant / employee.

The settings under Balancing method is relevant in a situation where booked revenue value is already on a fixed-price project, and the project manager changes the project’s budget or contract total (sum of payments) afterwards. In this case, the booked value on the project no longer corresponds to the project’s completion rate, and afterwards a need to balance this error arises.

An example:

January      
Budget      100 hours
Contract total     100,000
Registered hours:   10 hours
Completion rate    10% (10 / 100 hours)
Produced value    10,000 (100,000 * 10%)
Booked value   10,000 Booked on a voucher

 

February 1, the project manager estimates that the budget needs to be increased to 200 hours.

New budget        200 hours
Contract total    100,000
Registered hours    10 hours 
Completion rate   5% (10 / 200 hours)
Corr. produced value   5,000 (100,000 * 5%)
Booked value   10,000 Booked on a vouche
Necessary correction   -5,000

 

TimeLog offers three models for correction of such discrepancies.

Moderate relief (over the project's residual term) of deviations between estimated value and value creation on the project

If you use this model, the calculation is reset after each booking, and a new calculation based on the contract’s remaining budget and the contract’s rest total is made.

An example:

January      
Budget, hours   100
Contract total    100,000
Registered hours   10 hours
Completion rate    10% (10 / 100 hours)
Produced value    10,000 (100,000 * 10%)
Booked value   10,000 (Booked on a voucher)

 

February
February 1, the project manager estimates that the budget needs to be increased to 200 hours.

New remaining budget, hours     190 (200 hours – 10 registered hours in January)
New remainding contract total   90,000 (100,000 – 10,000 booked in January)
Registered hours in February   10
Completion rate   5.26% (10 / 190 hours)
Produced value January   10,000
Produced value February   4,734 (90,000 * 5.26%)
Produced value total   14,734

 

If the budget from the beginning in January had been 200 hours, the value of February’s hours would have been 5,000. The difference between 5,000 and 4,734 is due to TimeLog dividing the January error moderately on the rest of the hours.

This solidary model is suitable for project organisations that have long-term projects with several project members on each project, as depreciations are made moderately on all project hours and not only on the first or last hours in the project.

This is TimeLog’s default setting and the most commonly used calculation model across industries.

Immediate settlement of deviations between estimated value and value creation on the project without the opportunity for negative booked revenue

If you use this model, all hours produced after January will receive a 0 value until the produced value exceeds the booked value. In the above example this happens at 20 registered hours = 10% completion rate If more hours are registered, all not booked hours divide the difference between the produced value and the booked value pro rata.

This model secures that employees never can lose revenue by tracking hours on customers. The model is rarely used.

Immediate settlement of deviations between estimated value and value creation on the project with the opportunity for negative booked revenue

If you use this model, all hours produced after January will receive a negative value until the produced value exceeds the booked value. In the above example this happens at 20 registered hours = 10% completion rate

As long as less than 20 hours are registered, the not booked hours divide the negative value of -5.000 pro rata.

If more hours are registered, the not booked hours divide the difference between the produced value and the booked value pro rata.

This model follows the usual bookkeeping practice on registering a loss as soon as it is acknowledged. The model is not suitable for companies that pay commission salary to their employees based on produced revenue.

Revenue recognition for the contract models Continuous service and Continuous item invoicing

When you use the two contract models, you have the option to select between two ways to do your revenue distribution, if you have not spent the entire value of the contract when completing a monthly period.

  • Model 1: Extra value for the period is distributed across registrations within the period which is not booked as revenue yet and is assigned to the employees
  • Model 2: Registrations for the period keep their value and extra value is added to an empty voucher line and assigned to the company

Examples:
A continuous service contract is budgeted with 10 hours work per month with an hourly rate of 1,000 EUR. Here, you employees register 6 hours = 6,000 EUR, which leaves 4,000 EUR as non-used value.

When doing your revenue recognition after model 1, you write up the hours’ value from 6,000 to 10,000 EUR. When doing your revenue recognition after model 2, the hours keep the value of 6,000, and an extra line of 4,000 EUR is added to the value on the contract.

Special remarks

Please note that the current calculation model is saved on the project, when a project is created. If the model is changed later on, it will only apply for projects that are created after the changes are completed.

If the model is changed back and forth, it may contribute to your progress across projects not being comparable, since they run on different calculation models.

We therefore recommend that you carefully consider a change of the calculation model, as it has consequences for your reporting.

Last updated 02 Jul 2021