Projector includes a number of ways of looking at revenue. From Standard Revenue to Total Revenue, each type gives you insight into an aspect of your business. This article helps you quickly differentiate each type of revenue by providing you with a description and a practical example. How revenue is calculated often depends on whether an engagement's contract is Time and Materials (T&M), Fixed Price (FP), or Not to Exceed (NTE). First, let's enumerate the types of revenue that Projector can track and calculate. There is a short definition next to each to help you quickly find an answer, but please read the details section below to find out when these definitions may change depending on the contract type.
You'll notice that most of our tracked revenue types center around Time. This is because PSA firms are mostly concerned with time (labor) revenue as opposed to cost (non-labor) revenue.
- Standard Revenue - amount that you would typically charge
- Contract Revenue - amount that you negotiated the client would pay
- Billing Adjusted Revenue - amount that will actually be charged to the client
- Other Direct Cost Revenue - revenue earned from expenses charged to the client
- System Revenue - a combination of allocated revenue and dynamically allocated revenue (this one can be complicated so read more below)
- System Revenue Recognized - revenue that has been allocated via the revenue recognition process
- Total Revenue - System Revenue + Other Direct Cost Revenue
- Total Revenue Recognized - System Revenue Recognized + Other Direct Cost Revenue
One last thing before we get started, the following document makes some assumptions about how your installation was initially configured. If you have configured Projector in a non-standard way, then some of these definitions may not match your particular installation.
So we have a lot of different types of revenue to cover. I'm going to start with the four basic types, Standard, Contract, Billing Adjusted, and Other Direct Cost. These are the easiest to understand. Once you have a full understanding of them, we can move on to the more complicated types of revenue.
The first three types of revenue we'll address all have to do with time. They are Standard, Contract, and Billing Adjusted revenue. Functionally these are all very simple. You take the number of hours worked and multiple by your rate. Hours * Rate = Revenue. This works the same regardless of the contract terms (T&M, NTE, or FP). Now if you are thinking ahead, you might be wondering how this formula could possibly work for Fixed Price. If you negotiate that the client pays $1k, it doesn't matter if you work one hour or a million hours, the amount stays the same. We aren't going to get into that quite yet, but for now accept the fact that when looking at SR, CR, and BAR they are treated the same across all contract types.
The last type of revenue, Other Direct Cost, covers expenses. This one is very straightforward and we'll cover it quickly in the ODC subsection below.
Let's introduce our first type of revenue, Standard. Standard Revenue is based on your Standard Rates. So what are standard rates and where do they come from? When you first set up Projector you defined the billing rates that you typically charge based on a Department/Title combination. For example, Consultants in the Creative department bill at $150 an hour. These rates are often rough, but are a starting point for negotiating actual rates with your clients. They form a theoretical rate that is the baseline expectation on the amount of revenue someone typically earns.
To look up where a standard rate came from:
- Check the engagement type. For non-billable engagement types the rate is always zero.
- Write down engagement cost center, role department, role title
- Go to Cost Center editor and edit the cost center. Note the name of the standard rate card.
- Go to Rate Card editor and edit the rate card found in step 2. Cross-reference department and title from step 1.
If your organization has multiple divisions, you'll likely have a standard rate card for each division. In addition, you will likely have time phased rate cards. For example, the North America division has standard rates for FY2013, FY2014, etc.
Standard revenue is useful for analyzing what you would have earned using your standard rates. For Fixed Price engagements or NTE engagements that exceeded the cap - it shows you what you would have earned if you billed every hour.
Next we have Contract Revenue which is driven by the negotiated rate on the work being performed. We named it contract revenue because the rates are determined by the actual contract terms with the client. Contract rates often differ from Standard rates because Standard Rates are generally theoretical. Often your sales team needs to discount your rates to win the business.
To look up where your contract rate came from:
- Check the project's rate tab. The upper section defines your default contract rates for this project. Note the name of the rate card.
- Go to the Rate Card editor. Edit the card you found in step 1. Cross reference any department + title combo to find the rate.
- Default contract rates can be overridden on a per role basis. Edit each role and check the rates tab to see if there is an override.
- Specific work can also have contract rates overridden. Go back to your project's rate tab. The lower section defines specific contract rate overrides based on the type of work.
Contract revenue is useful for analyzing how much you should have earned. The delta between Contract and Standard revenue is your loss due to sales discounting. For Fixed Price engagements - it shows you what you would have earned if you billed every hour.
Billing Adjusted Revenue
This is the easiest of the three to understand. Billing Adjusted Revenue is the amount your client is billed for work performed. But you may be asking yourself, shouldn't the contract rates we just discussed always drive the amount billed? Not necessarily. If you have work the client is unhappy with, then you may discount that work. When this happens you end up with a difference between contract revenue and billing adjusted revenue.
To look up where your billing adjusted rate came from:
- Check the project's rate tab. The upper section defines your default billing adjusted rates for this project. Note the name of the rate card.
- Go to the Rate Card editor. Edit the card you found in step 1. Cross reference any department + title combo to find the rate.
- Default billing adjusted rates can be overridden on a per role basis. Edit each role and check the rates tab to see if there is an override.
- Specific work can also have billing adjusted rates overridden. Go back to your project's rate tab. The lower section defines specific billing adjusted rate overrides based on the type of work.
Contract revenue is useful for analyzing how much you should have earned. The delta between Billing Adjusted and Contract revenue is your loss due to delivery problems. For Fixed Price engagements - it shows you what you would have earned if you billed every hour.
Other Direct Cost Revenue
This is also an easy one to understand. Other Direct Cost Revenue is just a fancy way of saying revenue that you earned on expenses. If you mark up a plane ticket 25% before sending it on to the client, then that is revenue you earned. Most services organizations don't generate a lot of revenue from expenses, as their business is in people, not goods. However, some organizations may have significant ODC Revenue, particularly if they are using Treat Costs as Fees or Soft Costs.
Expenses by default have no markup, but on a per expense type basis you can automatically mark them up.
Beyond the Basics
So you should now have a pretty good understanding of four basic types of revenue in Projector. We are now going to move onto more complicated types of revenue in Projector. Why are they complicated? Because they involve what we call Dynamic Revenue Allocation (DRA). DRA is a means of looking at a group of time cards and deciding how much revenue should be allocated to them. This is unlike the basic ones we just talked about where the math is a simple Hours * Rate = Revenue. Please make sure you understand this important concept of Dynamic Revenue Allocation.
Dynamic Revenue Allocation (DRA)
The concept behind Dynamic Revenue Allocation is to calculate the appropriate amount of revenue that should land on a time card automatically. If you aren't familiar with how revenue is allocated to time cards, this can be a bit confusing, so we'll take our time and explain it step by step. If you are already familiar with how revenue is assigned to timecards, then you can likely skip this section.
Revenue is allocated differently depending on the contract type. This differs from the Basics section discussed previously where all three types behaved the same.
- T&M - operates just the way it did in the basics section. Hours worked multiplied by rate gives revenue earned.
- FP - revenue is earned based on how complete the project is and then allocated to timecards
- NTE - typically operates similar to T&M, however you may choose to run it like FP in cases where you expect to exceed the cap or if you are a larger organization that needs to be more conservative
Of these scenarios, FP is the scenario that is the most complicated. This requires knowing how complete a project is and then knowing how that revenue is assigned to time cards. So let's answer those questions!
Why do I care?
Dynamic Revenue Allocation allows Projector to allocate revenue to time cards in a way that conforms to your contract terms and adheres to Generally Accepted Accounting Principles (GAAP). What does that mean? It means that if you are audited, that you can explain why a certain amount of revenue was allocated to each, specific, time card. This is important because you are taking the complex task of accurately allocating revenue for historical time, and adhering to accounting principles, as well as accurately forecasting future revenue and when it should be marked as earned.
The percent complete determines how done you are at a specific point in time and how much revenue has been earned at that point in time. Let's tackle the first portion of that definition first. How "done" you are on a project is determined by comparing completed work in the past to planned work in the future. In Projector terminology, you are comparing actual hours to booked hours. Projector provides three ways of determining Percent Complete, but we'll start with the easiest which is Hours. If you have worked 25 hours and have 75 left to complete the project, then you are 25% done. Simple enough, right? Projector offers two other options, RDC and Contract Revenue. These methods turn the hours we talked about in the previous example into money. Let's use contract revenue instead of hours in our last example. 25 hours have been worked and 75 are remaining. They will all be worked by Sally who is bills at $100 an hour. That means she has done 2500 of work, and 7500 remains. The project is still 25% complete. Where things get interesting is when multiple people are working on the project. If Sally bills at $100 and Jim bills at $50 an hour, then who works those 25 hours matters. You may be more or less complete as a ratio of dollars vs hours.
Once we know the percent complete, we can now calculate how much revenue you earned. The math here is really easy. You look at how done you are, for example 25% in our example cases, and multiply by the contract value. If the contract is for 50k, you earned 25% of that, or 12.5k.
Your installation's percent complete method is defined in your system settings. You must choose exactly one method that applies to all engagements in your installation. Your choices are:
- Contract Revenue
Assign to Time cards
So hopefully you understand how Projector determines your percent complete. Next you need to understand how that revenue gets assigned to time cards. For me, the trick to understanding this is to picture each time card. Then determine how much each time card contributed to the percent complete number. Again we will work with hours because it is simpler. If 25 hours were worked, and the project is 25% complete, then each hour of work earned 1% of the revenue. So a timecard for 8 hours earns 8%. Looking at the same problem from a resource perspective, if Sally worked twice as much as Jim, she earns 2/3 of the revenue and Jim earns 1/3.
Revenue recognition is the process of locking down revenue on time cards. For T&M/NTE this happens automatically as time is approved. For fixed price engagements you must run the revenue recognition wizard. The wizard uses the dynamic revenue allocation method just discussed to assign a specific amount of revenue to time cards across a specific time period. This locks in the revenue on those time cards and it cannot be changed except by running the revenue recognition wizard again on the same time period. This is useful because as an engagement changes over time, perhaps taking longer to deliver than expected, your earned revenue in the past stays static, and Projector automatically spreads the remaining revenue across the rest of the engagement.
System revenue is revenue allocated to time cards based on your contract terms. It is your true revenue picture. This is revenue you have earned on a past time card or expect to earn on a future time card. When you speak with your auditor or accountant, you will be looking at system revenue to justify your earned labor revenue. This differs from SR, CR, and BAR discussed above which are purely analytical constructs. As system revenue is your real revenue, it can be compared across all three contract terms (T&M, NTE, FP) accurately.
Because system revenue is your true revenue picture, it is also the basis for calculations of profitability and margin at all levels, including clients, engagements, projects, and resources.
This is simply the total of your time and expense revenue.
System Revenue Recognized
Revenue that has been through the revenue recognition process. In NTE engagements System Revenue may differ from System Revenue Recognized and may be an indicator that profit may be slipping. Dynamic Revenue Allocation will respect the contract terms/cap of an NTE engagement and the allocation may result in System Revenue being less than System Revenue Recognized. You may want to consider running revenue recognition in this case. With revenue recognition performed System Revenue Recognized will always equal System Revenue for time periods in the past.
Total Revenue Recognized
Similar to total revenue, but only takes into account revenue that has been through the revenue recognition process. It uses the formula System Revenue Recognized + ODC revenue.
Rate Realization Analysis
Rate realization analysis is a technique that helps organizations understand the difference between what rates theoretically could have been earned and what rates were actually earned. Once variances are identified, you can mark which ones could have been avoided, increasing your operational efficiency and maximizing your revenue throughout an organization.
|Standard Revenue||Contract Revenue||Losses due to sales discounting. This is comparing your rack rates vs. the rates your sales team negotiated.|
|Contract Revenue||Billing Adjusted Revenue||Losses due to problems in the delivery process. This is comparing what your contract stipulated vs. what you needed to write off.|
|System Revenue||Billing Adjusted Revenue||Losses due to poor estimates on fixed price engagements. This compares what you would have earned on a T&M basis had an FP project been negotiated as such.|
Or, if you are using our Advanced Analytics Module (AAM) you can visualize your rate realization. The green bar represents what you actually earned. The stacked blue, red, and yellow bars represent revenue loss due to discounting, sales, and write downs.