Understanding revenue recognition for Fixed Fee projects

Created by Monica Madan, Modified on Thu, 15 Feb 2024 at 12:56 PM by Monica Madan

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Revenue recognition, a core accounting principle, guides how companies record their earnings over a particular period, regardless of when they receive payment. This is part of the accrual accounting method, which prioritizes recording revenue when it’s earned.


To properly apply this principle, careful project planning and budgeting are essential. By monitoring the time spent on a project, a company can gradually record revenue in line with project advancement. This method ensures that recorded revenue corresponds accurately with the services delivered, providing a true representation of the company’s performance.


Rocketlane offers multiple methods for recognising revenue, making it easy to keep track of finances.


Let's break down the definitions used in the revenue recognition calculations:

Fixed fee: This is the predetermined fee that you have agreed upon with the customer for the entire project. It is the amount that the customer will pay you for the completion of the project.


Tracked hours: This refers to the total number of hours that your team has logged for the project. It represents the actual time spent working on the project and is reported by your team via timesheets.


Budgeted hours: When you create a project, you typically estimate or set the total number of hours you expect to take to complete the project. This estimation is the budgeted hours, representing the planned time for the project.


Allocated hours: The sum allocated for individual resources assigned to the project.


Let's understand revenue recognition using an example:


Example: Let's consider a project called "Modert," which lasts 10 days. The budgeted hours for the project is 80h and the resources allocated across the project is 76h. The time tracked by the resources in timesheets so far is 8h




Method 1:

Recognise revenue based on hours tracked as percentage of budgeted hours.


Recognised revenue for a period =  (Tracked hours for that period / Budgeted hours) * Fixed Fee 

= (8/80)*20,000

= 2000 USD



Forecasted recognised revenue for a period = (Allocated hours for that period / Budgeted hours) * Fixed Fee 


Method 2:

Recognise revenue based on hours tracked as percentage of total allocated hours


Recognised revenue for a period =  (Tracked hours for that period / Total allocated hours) * Fixed Fee 


= (8/76)*20000

= 2,105.27 USD



Forecasted recognised revenue for a period = (Allocated hours for that period / Total allocated hours) * Fixed Fee 


Method 3:

Recognise revenue based on hours tracked as percentage of Estimate at completion (EAC) hours

Read more about EAC here


Recognised revenue for a period = (Tracked hours for that period / EAC) * Fixed Fee 


Forecasted recognised revenue for a period = (Allocated hours for that period / EAC ) * Fixed Fee 


Things to remember:
1. As the team keeps logging more hours and makes progress on the project, the revenue gets recognized for those hours.

2. However, the revenue that can be recognized is limited to the fixed fee, with a maximum cap of 100%. 

3. Once a project is marked as completed, if the recognized revenue is below 100%, the system will recognize the remaining portion of the fixed fee on the project completion date.


You can choose the appropriate revenue recognition method for fixed fee projects in Rocketlane,


  • Navigate to your avatar, and select settings
  • Scroll down to the Operations and Financials section
  • Select Financial Management
  • On the Financials page, you can select the preferred Revenue recognition for fixed fee projects



To get an overview of the Financials Dashboard, click here.


 



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