This section discusses progress payments and delivery invoices, in general. The concept of liquidation and some accounting issues will also be discussed.
Progress payment bills are sometimes used for fixed-price projects that require a long lead time before deliveries under the contract can be made, or where substantial amounts of money must be expended before the contractor becomes eligible for partial payments on deliveries. Progress payment bills are interim bills that allow you to recover a percentage of your incurred costs, even if deliveries have not been made.
With progress payment billings, your company is, in effect, operating under an arrangement similar to a line of credit. You submit bills on a monthly basis to the customer for a percentage of the incurred costs. The percentage of incurred costs that you can bill varies by project, but usually is from 80% to 95%. The remaining percentage is held until the finished goods are delivered.
The incurred costs eligible for billing depend on the status of your company ("large" or "small" business) for a given project. If your company is classified as a "large business" on a project, you use cash basis billing and, in general, only those costs that have been paid for can be billed. If your company is classified as a "small business" on a project, all incurred costs are eligible for billing. If you are using subcontractors on a project, they are also subject to the rules of progress payment bills. As such, reimbursement is made in full for subcontractors because their invoices submitted to you have already been reduced by the progress payment billing rate.
The provisions for progress payment billings are promulgated in Federal Acquisition Regulation (FAR) 52.232-16. Any company considering a progress payment billing arrangement should become very familiar with the provisions outlined in this FAR clause, as well as with the instructions on the back of form 1443.
Projects that bill using progress payments submit two distinct types of bills to the customer: progress payment invoices and delivery invoices. As noted above, progress payment invoices are based on costs incurred and are usually submitted on a monthly basis. In Costpoint, progress payment bills are generated in the Calculate Progress Payment Billings screen (Projects » Billing » Calculate Billings).
Delivery invoices are based on deliveries accepted by the customer and are submitted when the deliveries are made. You can submit delivery invoices using government form DD-250, Material Inspection and Receiving Report, or any generic invoice. You can print form DD-250s in the Print DD250 Invoices screen (Materials » Sales Order Entry » Invoices), if your company has purchased Costpoint Sales Order Entry. Companies without Costpoint Sales Order Entry can enter and print delivery invoices in Costpoint Billing in the Edit Project Product Bills screen (click Projects » Billing » Edit Billings) and the Print Project Product Bills screen (Projects » Billing » Print Billings).
When the customer pays progress payment bills, these payments represent a liability by your company because no delivery has been made. These payments are known as "unliquidated progress payments." When the delivery has been made, you must reduce the delivery invoice amount by a liquidation percentage, which is usually the same percentage as the progress payment rate. The customer does not pay you for the "gross" delivery invoice amount, but rather the "net" invoice amount, which includes a reduction for a percentage of the progress payments that have already been paid. Therefore, when deliveries are made, they "liquidate" a portion of the progress payments that have been paid to your company. This procedure allows you to reduce or eliminate the liability incurred when the progress payment bills were paid.
For example, if your company submits a delivery invoice that contains items totaling $100,000, and the liquidation rate is 80%, you will be paid $20,000. The delivery invoice is "netted" to arrive at the amount of the invoice because you would have already received the initial $80,000 on a progress payment bill before delivery was made.
Unliquidated progress payments are computed on the form 1443 as follows:
Total Progress Payments
less: Total Liquidations taken against Delivery Invoices
= Unliquidated Progress Payments
Unliquidated progress payments are frequently shown on the balance sheet as a liability rather than as a negative receivable. According to AICPA accounting literature, progress payments are not usually recognized on the balance sheet as receivables, and are not shown at all until the customer has paid them. This literature assumes that project costs are shown on the balance sheet as inventory (Work-In-Process), and it states that it would be incorrect to show progress payments as an offset to inventories. Examples of accounting transactions under each of the setup options are available in the "Initialization" section of this special topic.
In Costpoint, you have the option of showing project costs as inventory (WIP projects) or as income statement items (regular projects). If your company primarily uses WIP projects, you should consider NOT selecting the Progress Bills to GL When Billed check box in the Billing Settings screen (Projects » Billing » Controls). When you select this check box, all files except those in the general ledger are updated when progress payment bills are posted. In support of this, an option exists on the Accounts Receivable Aging Report that allows you to suppress progress payment invoices so that your receivables report will tie to your balance sheet.
Whether you are posting progress payments to the G/L when billed or not, you may want to present "Unliquidated Progress Payments" as a liability on the balance sheet, rather than mixed in with unbilled receivables.