Percentage of Completion Billing and Design Manager

Modified on: 2017-11-29 14:35:46 -0500


Typically percentage of completion recognizes revenues as a percentage of current cost compared to the total estimated cost of a contract (or project). Cost would be the costs of the merchandise or work paid to the vendors (this is not the contract price to the client). This method can only be used if you have very exact estimates of the total project/contract cost, price, a very stable mark-up or profit margin, a consistent way of making progress billings, and the costs incurred during a project is a reasonable estimate of the time to complete the project.

 

***Note:  The Design Manager program is not setup for this type of billing, it is setup for standard job cost accounting or can use the contract completion method of billing.***

 

DM assumes that most Designer?s contracts (projects) are fairly dynamic and progress towards the completion of a project is not normally measured by the incurred costs. For example, many Designers take a retainer/deposit and then have large planning phases, order merchandise all at once, and then have large installation or design phases. This does not work well with percentage of completion because the bulk of the costs all occur near the middle of the project and this along with a large retainer only at the start of the project makes the income look strange. Therefore we record income when the final invoice is done which applies a portion of the retainer or deposit; this gives the designer the option to bill sections of the job as they are completed and get a better reading of actual income. This method also has some tax benefits as income tax is not paid on the deposit until the project or contract is 100% satisfied.

 

One method, among many methods, that are considered acceptable by GAAP to convert your financials in Design Manager to percentage of completion would be to record all billings as deposits/retainers.  For example, you make a simple invoice in MS Word for each progress billing, and you would record these payments as deposits or retainers in DM). Income (or loss) at a point in time for a project would be the WIP (work in process) divided by the total estimated cost of the project multiplied by the progress billings to date (deposit balance for the project). When WIP equals the total estimated cost then the contract is considered 100% complete. The best reports to use for your Estimated Costs are the Profit Analysis and Project Time Analysis.  An Auto-reversing Journal Entry would be made at the close of each month for each current project to record revenue and COGS.  At the end of the project all items would be billed thus moving WIP to COGS and Deposits to Revenue permanently. This final invoice would adjust the revenue and costs of the project to reflect actual values.  Should the final bill be more than the actual estimated contract or project price (total deposit collected), it is up to your company's policy whether to collect the balance or adjust the invoice against revenue, thus showing less profit.

 

It is recommended to consult a CPA when determining the percentage of completion method, exact calculations, and if DM can be used.  DM consultants are available to talk with you and your accountant/CPA about the method of accounting and how to best implement it within DM.

 




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