Accounting Industry Billing Models: Fixed Price Agreements Contract-period

This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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Contract-period is where we have contract renewal dates that do not have any alignment with the client’s financial year. It is much easier for onboarding new clients, but can require a bit more administration.

When using the contract-period method, we start our engagement the month the client signs up with our practice and do not backdate the billing to the start of the financial year. We bill the annual accounts and tax returns in advance, and the in-period tasks such as GST and payroll during the year in which the billing is incurred. The main difference here is we do not backdate the billing to the start of the financial year. Instead, we have the renewal date on the same month each year.

Let’s look at an example:

Say we have a client sign up in the fifth month of the financial year. Under the in-advance method, we would have backdated five months of billing to align the invoices with the client's financial year. Whereas under the contract-period method, we identify the renewal date, and will not start the annual accounts work until all 12 installments have come in.

This method also accumulates negative WIP like the in-advance method.

Following is a diagram that illustrates how this works:

Note that this diagram shows the job being created two months before the financial year starts. This allows the practice to schedule all the tasks on the job in the two months leading up to the start of the financial year. The alternative is to have the job open on the first day of the start of the financial year. If this option is chosen, scheduling will have to be done once the financial year has started.

The key to this method is to move the repeating invoices syncing with the previous engagement to this new engagement on the renewal date. In this diagram the billing starts for the new engagement on the 6th month of the year, so the billing for the fifth month would be the 12^th installment on the last engagement. At that stage we would update our billing to send the invoices to the new job. We cover this in more detail in Chapter 7: Setting up Engagements.

You will need to keep track of your renewal dates so you can do the changeover. This can be done using a custom field in XPM or in an external spreadsheet.

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