--- title: Fixed price or time and materials? description: In most cases, time and materials is what applies. search: tags: - '1470' - fastpris - projekt --- ### Fixed price or time and materials.. How does it actually work? Fixed price can be confusing. For the accountant, thoughts about revenue recognition start spinning, but not for the company running project accounting — surely fixed price is nothing complicated? If you are unsure whether you should use time-and-materials or fixed-price projects, read on below where we explain the concepts. ### Time and materials or fixed price? In most cases, time and materials is what applies. Even if you have agreed a certain price for a month's work at a customer or similar, and then report hours on that project, it does not have to be a fixed price in accounting terms. The thing about fixed price is that you have precisely a set price for a project over time, and you may not know exactly when you will carry out the work and therefore cannot know when the revenue should be recognised. With fixed price in Kleer, the revenue is recognised only when time is reported, and depending on how you have estimated the time you write the project's revenue up or down on an ongoing basis or when the project is completed. ### The concept of fixed price — what does it actually mean? **Fixed price sounds dead easy! We always charge a fixed price for our services, right?** It is not always quite that simple. How you charge your customers affects your accounting, and so do your ways of working in the projects, and together this determines how you may recognise your revenue. ### Fixed price Put bluntly, you can say it like this: for the projects you invoice at a fixed price, you have agreed a certain price for carrying out the project and that is what applies. Then, if you spend fewer hours than expected on the project or more hours, that simply affects your margins but not what you invoice the customer. If you do any work that is not covered by the agreement, you charge for it separately on a time-and-materials basis. ### Time and materials If you work on a time-and-materials basis, you most likely have an agreed hourly price and simply invoice for the time you spend on the project. ### Aren't there different rules — what actually applies? **The main rule** and **the alternative rule** are concepts used in revenue recognition and when it comes to projects. Assignments carried out on a time-and-materials basis can only be recognised under the main rule, whereas for fixed-price projects you can decide on either the main rule or the alternative rule. ### The main rule The main rule is also known as **percentage-of-completion accounting** and means that revenue is recognised in the income statement as the work is carried out, regardless of when the invoice is sent. ### The alternative rule Under the alternative rule, revenue and costs are recognised when a project is completed. Ongoing projects are recorded in the balance sheet in the meantime until they are finished. Only then are the project's revenue and costs recorded in the income statement. ### How do we choose a rule? If you work with fixed-price projects, your auditor is an excellent person to discuss with regarding which framework suits you. After all, it is your auditor who audits and approves the principles in connection with the review of your annual accounts. You may, however, always switch to the main rule. But if you have instead been applying the main rule and want to follow the alternative rule, you need to have special grounds for doing so. Contact your Kleer consultant or auditor if you have questions about how to accrue your revenue. ### So what does it mean if you use fixed price in Kleer? The fixed-price module in Kleer supports **fixed price under the main rule,** that is, percentage-of-completion accounting. **Fixed price under the alternative rule** is something handled manually in the system, usually in connection with the closing of the accounts. ### How does it work? #### 1. Invoicing plan You set up an invoicing plan in Kleer in the project you have created. In this invoicing plan you choose the invoice date, product and so on, and you can preview the invoice you have created. You can create several invoices for different periods ahead, which are then included in the plan. You will also see a summary for the invoicing plan. The invoice will be created automatically when it is time to approve and send it, based on the invoice date chosen in the invoicing plan. When the invoice is approved, no revenue is recognised; instead the entire amount excluding VAT is posted to account 1470. The revenue will only be recognised in the income statement when time is reported on this project in Kleer. #### 2. Enter a revenue budget Enter a revenue budget for what you have agreed with the customer to invoice as a fixed price. This makes it easier to follow up how far you have got in the project and how you stand in terms of hours spent. It simply becomes easier to see whether you have made an accurate estimate of hours, costs and revenue. #### 3. Report time You must report time spent on the project in Kleer, and be diligent about it. It is precisely as you report time that the revenue is recognised. #### What is recognised as revenue, and when? What will be recognised as revenue is the customer invoice price on the activity you report hours on. Consider whether you need a separate activity for fixed price in order to control what is recognised as revenue for each hour worked. Because revenue is recorded when hours spent are approved, it is important to reconcile your position on an ongoing basis. That way you can review already at this stage whether you are recognising too much or too little revenue in relation to the agreement, and whether there is a need to write it up or down. ### Related guides - **Fixed-price projects in Kleer — how does it work?** (internal consultant guide, not published here)