I have written about the most commonly used contract types within time & material and fixed price projects by the consultancy industry. Last time it was about pros and cons for the contract types Invoicing based on a payment plan with revenue recognition per project or task
In this post, I look closer at the contract types Service contract (continuous contract) and Item invoicing (continuous contract).
Continuous service (continuous contract)
Many IT companies, accountants and product-based companies supplying services based on monthly, quarterly or annual contracts, i.e. subscriptions.
Customers are invoiced at a fixed monthly rate, regardless of the time spent completing the task in question.Invoicing these contracts is not a demanding job per se; it can be solved using one of many financial systems supporting subscription invoicing.
The main challenge is revenue; for a company measuring revenue based on departments, teams or employees, forecasting and revenue recognition need to take into account the fact that every period of the agreement cannot take in more than the invoiced value of the period as revenue.
In practice, many companies need to manually recognise revenue for work – a time-consuming and high-risk process. Also, the key figures are highly imprecise for the current accounting period, as the adaptation to periodic budgets is only performed in connection with bookkeeping.
It is, therefore, important to find a system that takes its point of departure in both invoicing and revenue recognition to ensure you the right picture of the value creation.
Item invoicing (continuous contract)
The fixed-price contract with volume-based invoicing is an advanced variant of the fixed-price service contract.
These contracts are based on goods, not hours, despite these actually being consulting services.
Here are some examples of contract types with consulting invoiced as items:
- Number of processed payslips
- Number of monitored servers
- Number of bookkeeping records
In more complex cases, a direct external cost of the goods in question may be attached, e.g. a software license etc. to be handled.
The disadvantage of this contract type is that it is challenging to manage for a consultancy since the number of items often vary each month (e.g. the no. of payslips). This means that the monthly budget on the work and direct costs also vary each month.
The advantage is that this type supports sales of other surrounding services, and the consultancies become less dependent on only selling hours.
I hope that my assessment of the contract types has made you smarter or inspired you to expand your contract invoicing in your company depending on the services you offer.
If you want to dive further into the contract types in the consulting industry, I recommend you to read TimeLog’s white paper on the subject.