Differences between Fixed Price & Cost Plus projects in Project Accounting

TechKnowledge Content

These type of Projects are very similar to each other, but they also have some differences. With the Fixed Price/Cost Plus projects you have 3 different accounting methods Cost-to-Cost, Effort Expended, and Completed .

One of the differences are the Completed accounting methods

This is where revenue is recognized only on completion or substantial completion of the contract. It is typically used in situations where the contract is short-term. The principal advantage of the complete-contract method is that reported revenue is based on final results rather than on estimates of unperformed work. Its major disadvantage is that it does not reflect current performance when the period of a contract extends into more than one accounting period. Revenue is recognized all at once in the year the project is completed. Once a project has been assigned a status of Completed, all cost categories can be marked as Completed and revenue can be recognized. You are not allowed in the Revenue Recognition window unless the status of the project has been changed to Completed. Billing can be done in either an Open or a Completed status, but typically it is done at the end of the project. When revenue is recognized, the Profit & Loss statement is affected via a credit to the Project Revenue account.

Revenue recognition and Billing work differently for Cost Plus and Fixed Price projects that have Completed accounting methods.

Cost Plus projects use the Cost to Cost calculation. So even though you set your project to Completed, the percentage of completion will not be set to 100% and you may not be recognizing all the revenue or billing all of your cost transactions. (If you wanted to do this, you would need to update your budgets to match your actuals.) Fixed Price on the other hand, does automatically set the percentage of completion to 100%. All the revenue is recognized and billings are done for the full amount.

Another difference between the two Project Types is the Profit Type.

Cost Plus uses Profit per Unit Variable and % of Actual.

Fixed Price uses Profit per Unit Fixed and % of Baseline.

Both types can use Total Profit, and None as the Profit types.

This article was TechKnowledge Document ID: 26137

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