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.
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. 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.