Three weeks ago, we started a serial about the eight most commonly used contract types in the consultancy industry. The first post was about the invoicing types Time & material - Continuous payment and Prepaid hours.
The invoicing types in this post are still Time & material and called On account invoicing with end-balancing and with periodic balancing.
On-account invoicing with end-balancing
This type of invoicing type is a variety of the common Time and material – continuous payment. Long-term, fairly large projects use this type of contract, where you have requested payment for part of the total budget before and during project work, but where the final consumption is to be invoiced upon project completion. At the end of the project, a balancing of what the customers has paid in advance and the total consumption of hours is made.
One example is a time and material contract with an agreed budget of DKK 100,000 for which the customer accepts an advance payment of DKK 50,000, an additional DKK 10,000 half-way through the project and the remaining amount upon completion. As the contract is based on time and material, the remaining amount is the difference between the cost of the work performed and the DKK 60,000 paid, which is then invoiced before delivering the project.
The advantage with this invoicing type is that you still get paid per hour, but have initial capital and invoicing does not have to wait until you have done the work. The disadvantage may be that you have overestimated the project, so the customer ends up paying too much, which you will have to credit at the end of the project.
On account with periodic balancing
This type of invoicing is typically seen in industries with an ongoing cooperation between customer and supplier.
Here, the supplier invoices the customer for a budgeted amount every period in advance – typically monthly or quarterly. Once the period is over, the prepayment is offset against the value of the actual work performed during the period. The customer then receives an invoice including both this balance and the prepayment for the coming period.
This type of invoicing is often used in consultancies providing ongoing and unspecified assistance for their clients. Another type of fixed-price contract, the Continuous service contract, is based on a well defined periodic payments. I will go into detail with this invoicing type in one of my next posts.
The advantage is that you are secures a regular income, which can be included in the budget for the agreed contract period. Please note that if work is done faster than you thought, you will have to pay back the customer.
Both on account invoicing types are demanding to manage manually, if you do not use a professional time tracking and contract management system.
If you want to read more about contract management in consultancies, you can find more information and examples in TimeLog’s whitepaper on the subject.