11/7/22, 8:52 AM How to Deal with Unbilled Receivables and Contract Revenue Calculations

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How to Deal with Unbilled Receivables

and Contract Revenue Calculations
Business Tips,
Accounting
11/14/2018
G. Chris Brown

Contractors may have unbilled receivables for a variety of reasons. Here are some examples, as
well as a few tips on how to deal with them.

When unbilled receivables occur, it is because they cannot be billed yet under the terms of a
contract. Having unbilled accounts receivables (A/R) results in revenue that is recorded but not
billed, so it should be analyzed and reconciled as part of a month-end process.

Unfortunately, auditors view unbilled A/R with scrutiny and so do lending institutions.
Understanding your unbilled A/R will help you justify and support your revenue position as well as
the collectability of the outstanding receivables to your banker.

Contractors may have unbilled A/R for a variety of reasons. Here are some of the most common
unbilled A/R scenarios so you can plan for, and reconcile, them efficiently.

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1. Rate variances occur when the actual indirect rates

differ from provisional or target rates. When actual
rates are greater than the target ones, a positive
unbilled A/R balance occurs, which indicates that
you are not billing as much as you can. And, when
actual rates are less than target rates, a negative
unbilled A/R balance occurs, showing that the
company may owe money back to the government
during the contract closing process.

2. Retainage happens in contracts that have a fee

withhold per FAR 52.216-8, Fixed Fee. This
occurrence gives the contracting officer the option of
withholding up to 15 percent of the fixed fee on cost-
type contracts. Additionally, FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour
Contracts, gives the contracting officer the option of withholding up to five percent of amounts
due. The government keeps a portion of the amount due to the contractor until the contract is
completed successfully.

3. At risk work occurs when your company begins to perform on a project without a signed
contract or before the actual start date of the contract. Projects are also considered at-risk when
the contractor works on the contract beyond the current funding level for the period of
performance on a contract or task order.

4. Milestone billings refer to being able to bill only for specific portions of the statement of work
that are completed, such as delivery and acceptance milestones. All work done before
completing a milestone is considered an unbilled receivable.

5. Award or incentive fee unbilled A/R refers to when the contractor is unable to bill for an award
or incentive fee until the government has awarded that fee through a formal contract modification.

When dealing with unbilled receivables, it helps to have a reliable accounting system that has
been tailor-made for the intricacies of government contracting. In general, most systems just won't
cut it when you have to answer to DCAA and its auditors.

Many accounting systems have contract revenue recognition capabilities, but their complexity and
improper utilization can create contract revenue postings to the GL that are difficult to reconcile.
And, it's no surprise that unbilled receivables and contract revenue numbers are subject to
scrutiny by CPA firms.

Contract revenue recognition capabilities should be carefully considered not only in terms of the
methods, but also for the complexity of setup. You should also assess the potential impact of
calculating revenue and unbilled receivables for when there is a good chance user error will
occur.

The main issue to pay attention to is realizable revenue. A/R billed amounts should be the base
method of revenue recognition with adjunct features and proper accounting procedures to ensure
the basic accounting principle of matching contract revenue with the costs of that revenue.
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Indirect Costs variances, where increases and decreases of revenue are automatically posted can
create results that are misleading.

As mentioned above, an accounting system designed specifically for government contractors can
help you deal with a range of issues your commercial sector counterparts don't have to face.
Contract revenue recognition should be an administrative function that properly trained users
should manage and reconcile each month so you are never left with unbilled receivables you
can't account for.

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