Introduction

Service contracts and support contracts are agreements that span a predefined period and are subject to automatic or negotiated renewal. Contracts typically include recurring services and coverage such as inspections, preventative maintenance, break/fix support, warranty, upgrades, consulting, and training.

Although the terms “service contract” and “support contract” are often used synonymously, they are in fact different in approach. Service agreements are typically based on the occurrence of service incidents on the covered equipment. This is a reactive and a transactional approach. Support agreements are based on a long-term relationship with the integrator to support the equipment in a proactive manner and with a refresh strategy. Both contracts represent a good source of recurring monthly revenue (RMR), provided the administration of these contracts is executed with minimal overhead and the client recognizes the value of the agreement.

Business Challenge

With the potential for an integrator to have many service contract agreements in place with many different customers (often different service agreements with the same customer based on multiple buildings, floors, systems, etc.), the following challenges are presented:

What should be the method and frequency of billing on various types of contracts?

How should you recognize the revenue of various types of contracts?

Cash Versus Accrual Accounting

Q360 runs primarily on an accrual accounting method. Before explaining best practices, it is important to understand the distinction between cash versus accrual accounting concepts. This is summarized in the following details:

Cash Accounting

• Revenue occurs when you get paid
• Expenses occur when you pay for something

Accrual Accounting

• Revenue occurs when expenses are incurred or a time period passes
• Expenses are not tied to payment
• Billing is not required to earn revenue

Billing Versus Revenue Recognition

In the context of service and support contracts, billing can be done in one of the following ways:

• Before service delivery – Pre-billing occurs ahead of time and revenue deferred
• During service delivery – Pre-billing occurs but is not deferred, typically in the same month as a service like inspection is delivered
• After service delivery – Billing is issued only after the service is delivered

Meanwhile, revenue recognition is an accounting calculation that takes into account the type of billing and the nature of the contract. There are two types of contracts from revenue recognition standpoint:

Time based

Examples:

• A contract will have a coverage period Jan 1^st – Dec 31^st
• 12 financial periods
• Contract is billed in advance or upon commencement of coverage
• A portion of revenue is recognized each period
• In this case 1/12^th of the contract each month
• Billing frequencies can be annual, bi-annual, quarterly, monthly, or otherwise full term.
  • “Full term” is billed once for the entire contract duration (start date to end date);  the other options are potentially multiple billings, depending on the service contract duration.
  • Service contracts may be auto renewed for all billing frequencies EXCEPT for “full term”.

Performance based

Examples:

• A contract will have deliverables such as inspection or hours of training
• Revenue is recognized when the service is performed

Recommended Practice

The following table outlines typical billing and revenue recognition methods for common types of contract agreements. We recommend seeking accounting advice for your specific cases.

In Q360

The two primary Q360 objects to work with when delivering time or performance-based services are service contracts and service calls.

Service contracts represent time-bound service or support agreements. They can be set up to generate invoices or not. If they do generate invoices, you can choose to defer or not defer that amount, on a contract by contract basis, depending on the nature of the contract.

Service calls represent the performance or delivery of a service, such as an inspection. Calls can be flagged as billable or non-billable. If billable, the invoice generated would recognize revenue in the posting accounting period (i.e., not deferred).

The following table shows typical usage scenarios of Q360 for each type contract listed above:

Frequently Asked Questions

When deferring revenue on certain contracts, how do I project revenue to be earned during each accounting period?
Use Service Contract Revenue Projection live data report.

When performing a service which will be billed after delivery, can I fix the billing amount inline with the terms of the contract?
Yes, you can set the call’s Billing Type to FIXED, and enter the fixed amount for that call.

Can I pre-schedule service delivery calls inline with the terms of the contract?
Yes, you can use Recurring Calls feature of Q360. When creating recurring call schedule, you can additionally specify a fixed billing amount for each call generated off that schedule.

Published: May 29, 2020