Unbilled Receivable That Keeps Growing
Meridian Systems runs a 2.4 million dollar fixed-price systems integration project. Two bill plans sit on the contract: BP-LABOR, rate-based with a bill rate schedule and 10 percent retainage held until the plan reaches 90 percent complete; and BP-MILESTONES, amount-based, with four milestone amounts. Both plans are Invoice and Revenue, and the contract's revenue plan uses a cost-to-cost method. Six months in, the project has recognised 1.35M of revenue, generated 700k of invoices, and 650k of unbilled receivable sits on the project. The controller also notices that two milestones totalling 400k were invoiced in month 4 even though the associated work had barely started, and that 22 labour lines silently dropped out of the October labour invoice because the engineers' job grades had been reorganised in HR.
1. Explain the 650k unbilled receivable and separate it from the retainage the controller is worried about. What would you check first, and what design change would stop the divergence recurring?
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What unbilled receivable is: for plans that recognise revenue and bill, unbilled receivable is the cumulative difference between revenue recognised and amounts billed/released, by project and contract line. It is a balance, not an error. Here it exists because revenue and billing are pulled by three different engines:
- Revenue: cost-to-cost, i.e. percent complete = cost incurred / total forecast cost, valued against the contract's total value.
- BP-LABOR billing: hours x rates on the bill rate schedule, less retainage.
- BP-MILESTONES billing: fixed amounts released on milestone (or on manual generation), unrelated to cost.
Revenue will diverge from billing whenever the cost curve and the billing curve differ - front-loaded milestones, labour billed below cost, or a stale estimate of total cost. Mixed fixed-price and rate-based contracts almost always carry a persistent unbilled position.
Retainage is a different animal. The 10 percent held on BP-LABOR reduces the amount due on each invoice and posts to retainage receivable; it affects cash and the receivable mix but does not create unbilled receivable. Do not let the two be netted in the explanation.
Check first, in this order:
- Is the forecast current? Verify the forecast version feeding the total-cost-at-completion, and that it was regenerated after the last scope change. A stale low EAC overstates percent complete and therefore revenue.
- Is BP-MILESTONES truly Invoice and Revenue? If so, milestone revenue equals the invoiced amount and only BP-LABOR drives the divergence; if it is Invoice only, the revenue plan is driving all of it.
- Age the unbilled balance and confirm no billed-but-unreleased invoices or holds are sitting in draft.
Design change: align the bases. If the commercial substance is milestone-driven, put the milestone amounts on a plan that governs both invoice and revenue so revenue tracks billing. If cost-to-cost is contractually required, keep it, but report unbilled receivable as a planned funding gap with a conversion curve, and review it in the monthly close rather than treating it as an exception.
2. Two milestones worth 400k were invoiced in month 4 while the work had barely started. What is the accounting consequence and what configuration and process controls would you put in place?
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Consequence: because BP-MILESTONES is an Invoice and Revenue plan, invoicing the milestone recognises the revenue at the same time. Profitable revenue is therefore pulled forward into month 4 ahead of the work, distorting both the monthly P&L and project margin, and it inflates the receivable that you then have to collect against undelivered work. With cost-to-cost on the contract revenue plan, the two revenue streams are now contradicting each other, which is exactly why the controller cannot reconcile the unbilled balance.
Why it happened: an amount-based plan invoices the amount it is told to invoice. Unless the release is gated by a billing event tied to a deliverable, or by an approval, the plan has no knowledge of physical progress.
Configuration controls:
- Tie milestone releases to billing events or to an approval step so the release is evidence-based, not calendar-based.
- Decide deliberately whether each milestone plan is Invoice and Revenue or Invoice only. If revenue must follow progress, make the milestone plan Invoice only and let the cost-to-cost revenue plan govern recognition - that removes the front-loading at source.
- Apply a bill plan hold or invoice hold and require project manager release for milestone invoices.
- Do not let users generate manual invoices against the contract; restrict invoice generation to the scheduled process.
Process controls: a month-end reconciliation of milestone invoiced versus milestone progress, with the PM signing off milestones before release; and a review of any bill plan whose invoiced-to-date materially exceeds cost-to-cost progress.
3. Why did 22 labour lines drop out of the October invoice, and how do you correct October without restating history incorrectly?
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Mechanism. Rate-based billing has to resolve a rate for each billable expenditure item on the item's effective date. Resolution walks the configured hierarchy: a rate override on the bill plan or contract, then the bill rate schedule entry for the most specific match (person, then role, job or grade), then any default. When HR reorganized job grades, the October items referenced grades that either had no entry in the bill rate schedule or were not effective on the item date. Items without a resolvable rate cannot be priced, so they are excluded from the invoice - or parked on the invoice exception hold, which is worth checking before assuming they vanished.
Correct October:
- Determine the invoice state. If the October invoice is still a draft, delete and regenerate it after the fix - drafts are safe to regenerate. If it has been released, you cannot regenerate it; raise a supplementary invoice for the omitted amounts, or credit and rebill, according to your revenue policy.
- Add the missing grades to the bill rate schedule with correct effective dates, effective from at least the start of October, so the items price correctly. For a one-off gap, consider an item-level rate override rather than a schedule change that affects future periods.
- Verify the items are still billable and carry a valid bill transaction type before regenerating; a reorganized grade can also have broken expenditure type or organization mapping.
Prevent it: effective-date rate schedules ahead of HR changes, and a standing close task that reviews invoice exceptions and never-released draft invoices before the billing run is closed. Grade and role reorganizations should be a trigger in the change process to review bill rate schedules and resource role mapping on the same day.