Understanding revenue recognition contracts and clauses

Revenue recognition contracts determine when earnings for a project will be available to officially recognize as revenue.

Each contract is comprised of one or more clauses that define the revenue recognition rules.

Administrators can edit the name of each system-level contract, as well as the parameters selected in it. The parameters they select, such as Day or Month in the Equal Distribution clause, serve as the defaults when these contracts are later assigned to projects; all parameters remain available for selection at the project-level.

Project managers assign revenue contracts to projects when they create projects. Once a new project is saved, managers can edit the contract via the Revenue tab for that project. They can:

  • Choose new parameters
  • Add new clauses
Clauses can’t be edited once they’ve been used to calculate recognizable revenue for the project.

Currently, two default clauses – along with two contracts based on those clauses – are available in Replicon. Refer to the sections below for information on each. Or, if these don't meet your requirements, we can create custom clauses for you.

Percent of Completion

Percent of Completion is the most commonly-used method of calculating revenue in professional services companies. It can be used to comply with IFRS 15 and ASC 606.

Using this method, the percent of revenue that is recognizable at any given moment is equal to the percent of work that has been completed on the project at that moment. This is calculated as outlined below.

Recognizable revenue for a project, based on costs:

= % Complete * Total contract value

= (Actual costs to date / Estimated total cost) * Total contract value

Where:

  • Actual cost to date is
    The hours recorded for the project, by a resource * their cost rate, for all resources
  • Estimated total cost is
    The total hours a resource is allocated to the project * their cost rate, for all resources
  • Total contract value is
    The amount entered in the Total Contract Value field on the project’s Project Info page
This rule allows you to base calculations on hours instead of costs, if that’s your preference. However, in most cases, we recommend using project costs to calculate completion, since they take into account each resource’s rate of pay.

Equal Distribution

Using this method, revenue becomes recognizable based on how much time has passed in the project contract. You can choose the frequency at which new revenue becomes recognizable, either daily or at the end of each month.

With Equal Distribution, resources do not have to complete work on the project for revenue to become recognizable; recognizable revenue is wholly dependent on the contract dates and total contract value.

Calculations are not based on project start and end dates, defined on the Project Info page, but the dates defined in the contract.


End Date is shown first when setting up this contract/clause; ensure your dates are ordered appropriately, or no calculations will occur.

Day example

Imagine you choose the Day option, your contract runs from October 1 to October 10, and the total contract is $10000.

Since the contract runs for 10 days, each day ($10000/10) = $1000 will be added to the available recognizable revenue.

Therefore, recognizable revenue will be added as follows:

Date

Amount that becomes recognizable on this date

Cumulative recognizable amount as of this date

Oct 1

$1000

$1000

Oct 2

$1000

$2000

Oct 3

$1000

$3000

Oct 4

$1000

$4000

Oct 5

$1000

$5000

Oct 6

$1000

$6000

Oct 7

$1000

$7000

Oct 8

$1000

$8000

Oct 9

$1000

$9000

Oct 10

$1000

$10000

Month example

Imagine you choose the Month option, and your contract runs from May 17 to Sept 29, and the total contract is $10000.

With this option, revenue becomes recognizable on the last day of each month the contract even partially includes:

Date

Amount that becomes recognizable on this date

Cumulative recognizable amount as of this date

May 17 (contract starts)

$0

$0

May 31

$2000

$2000

June 30

$2000

$4000

July 31

$2000

$6000

Aug 31

$2000

$8000

Sept 29 (contract ends)

$0

$8000

Sept 30

$2000

$10000