Unbilled Accounts Receivable: Real or Imagined Assets?
Unbilled accounts receivable (A/R) represents recorded revenue that has not yet been billed on a contract. There can be many different reasons for having unbilled A/R recorded on the balance sheet (B/S). Government contractors with cost reimbursable contracts tend to have greater unbilled accounts that stay on the B/S longer. The most common reasons for unbilled A/R are the following:
- Timing differences: These can exist due to the normal timeframe of processing employee timesheets and invoices through the accounting system. These amounts should be billed as soon as possible in accordance with contractual terms.
- Rate variances: These can exist when actual indirect rates are different than provisional or target rates. If actual rates are greater than provisional rates, an unbilled A/R balance will show on the company’s B/S. If actual rates are less than provisional rates, a negative unbilled A/R balance (actually a liability) will be on the company’s B/S. These variances should be monitored and adjusted annually. Unfortunately, it may be several years before final costs are determined by the government and the contractor is allowed to close out a contract. However, new guidance by the Defense Contract Audit Agency (“DCAA”) allows auditors to accept proposed indirect rates as final rates if risk is determined to be low.
- Costs in excess of billings: These can exist when the billings are less than the amount of revenue that can be recognized to date based on the percentage-of-completion method of revenue recognition. Likewise, billings in excess of costs exist when billings exceed the amount of costs incurred to date. Similar to timing differences, costs in excess of billings should be billed as soon as possible in accordance with contractual terms.
- Retainage: These can exist when government contracts have a clause that limits the billing of a fee up to 85 percent of the negotiated fixed fee (FAR 52.216-8). Under this clause, the government has the authority to retain a portion of the contract until all contract terms are adequately completed. These amounts should be reviewed against expected completion date to measure when the amounts can be billed.
When the unbilled A/R is caused by a rate variance, the amounts are likely to increase each year and remain on the B/S for a longer period of time. Unbilled A/R should be reconciled on a monthly basis, and an aging report of unbilled A/R should be generated and reviewed monthly to assess collectability. This is a critical area to manage to ensure amounts are properly recorded and billed in a timely manner. Contractors should bill/credit rate differences annually upon completion of their incurred cost submission. However, it is rare that a government agency will pay amounts owed until after the final rates are negotiated. The government will, however, send letters of demand for payment on over billings.
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