Because payment terms on individual contracts vary widely, professional services firms need great flexibility in how they do billing. Payment terms generally fall under two headings:
Billing for time & materials contracts
Here, the client agrees to pay for the time spent and expenses incurred in doing the agreed work. Professional services billing relies on time and expense tracking systems to collect the effort and expenses for client authorization. It makes sense for time and expenses to be collected with the same system.
Billable sums are calculated by applying the agreed rates. This can get quite complex when different rates are negotiated for individual projects. Also, the rates will often vary according to the type of work done, rather than just the time booked by each person. This requires activity or role based rates.
Profitability is measured by applying both cost rates and billable rates to the hours booked. Maintaining the cash flow forecast requires planned vs actual comparison reports for monthly billable sums.
To improve cash flow, time and expenses must be submitted by specified dates so that client authorization and billing will not be delayed. Automatic email reminders for late time and expense submissions are also helpful, for effective professional services billing.
Billing for stage payment contracts
Many clients prefer stage payment contracts, where agreed sums become billable as milestones are achieved. Milestones relate to key deliverables or other defined events. Timesheet information is used to calculate costs only and play no part in professional services billing.
To track project profitability, revenue recognition must be computed each month, particularly on lengthy projects where stage payments can be months apart. Revenue recognition relies on an independent assessment of the value of work achieved, the Earned Value, which should be compared with the actual spend.
Realistic estimates to complete can then be calculated for comparison with the project budget. This comparison gives early warning of poor performance in time for corrective action to be taken.
Chart shows project performance on a stage payment contract.
Innate Resource Management Software
Within its resource management software, Innate provides professional services billing for both time and materials and stage payment contracts.
- Project budgets are normally built up from individual task estimates.
- The time and expenses system enables staff to easily record their effort and expenses in the required level of detail. Email alerts remind staff when submission falls overdue, and views can be set up to streamline the client approval process.
- Multiple rate sets can be maintained, so that the appropriate cost and billable rates are applied. Role based rates can be handled, for when an individual’s rates are dependent on the task they work on, e.g. John Smith may be charged at a higher rate for his project management work than for the time he spends testing.
- Revenue recognition rules and calculations can be accommodated, and standard reports show project estimates to completion against the budget.
- Billable amounts can easily be exported to the finance system for Invoice preparation, to complete the professional services billing process.
Professional services firms need great flexibility in billing. Innate resource management software provides effective billing for professional services.