Revenue recognition adjustments generally need to be made by professional services organizations if the contract that has been negotiated with a client defines a fixed price or time and materials with a cap agreement.
- Fixed Price – Fixed price engagements have a contractually negotiated price that the client will pay to the professional services organization in return for the completion of the project. This price will be paid to the vendor no matter how much labor the vendor needs to invest in the project. The final fixed price of the engagement may be paid all at once, periodically throughout the life of the project, or based on the completion of individual milestones. These actual payment terms don't affect how organizations need to recognize revenue in Projector.
- Time and Materials with a Cap – Time and materials with a cap engagements (for brevity, will be referred to as capped engagements) also have a contractually negotiated price cap that defines the maximum price that the client will pay to the vendor for the completion of the work. The client pays on a time and materials basis contract rates until the cap is reached. After that point, if more work remains to complete the project, the vendor is ineligible to continue getting paid. As such, a vendor can receive less revenue than defined by the cap for capped projects, but cannot receive more than the cap.
Engagements that are being delivered under pure time and materials contracts don't generally require revenue recognition adjustments. There are situations in which organizations may choose to make revenue recognition adjustments for contracts that are structured as pure time and materials arrangements, such as if a project is running over budget and management does not believe that the client can, will, or should pay the overage, regardless of the contractual language. In these situations, organizations need to exercise their own business judgment regarding how to properly recognize revenue.