PM510 – Fixed Price Projects: Completed Contract Revenue Recognition in Dynamics 365 Finance

Introduction

Managing Fixed Price Projects under the Completed Contract Revenue Recognition method requires a structured approach to ensure that revenue is recognized only when the project is fully completed. Unlike the Percentage of Completion (POC) method, where revenue is recognized progressively, the Completed Contract method defers revenue recognition until all contractual obligations are met, providing a more conservative financial reporting approach.

In Dynamics 365 Finance – Project Management and Accounting, the Completed Contract method ensures that revenue remains unrecognized during the project execution phase, with all costs recorded under Work in Progress (WIP). Once the project is finalized and the contract is fulfilled, revenue is recognized in full, and all related financial postings are completed. This approach is particularly useful for projects where revenue uncertainty exists or where financial compliance mandates deferred revenue recognition.

The Completed Contract method in Dynamics 365 follows a clear financial posting structure, with the following journal entries at each stage:

Journal Entries for Completed Contract Revenue Recognition

By leveraging Dynamics 365 Finance, organizations can effectively manage long-term projects, ensure financial compliance, and maintain accurate revenue tracking under the Completed Contract method, aligning financial reporting with contractual obligations.

No nominal accounts are used within the Project group; instead, nominal accounts are defined in the Ledger Posting setup.

PROJECT GROUP

Scenario to Focus

A car part distribution company embarks on a Fixed Price Project to build a new warehouse. The project involves significant investment in construction labor, materials, and equipment. The company opts to recognize revenue only when the entire project is complete, ensuring all capitalizable costs are accounted for and transferred to the fixed asset ledger. This approach minimizes premature revenue reporting and ensures financial compliance.

This article will guide you through how Dynamics 365 Finance facilitates the management of Fixed Price Projects using the Completed Contract method, ensuring accuracy and adherence to accounting standards.

Project lifecycle

Initiate Project

Create, Send and Confirm Quotation

The step-by-step process for creating a quotation, sending it to the customer, and transferring the quotation’s Work Breakdown Structure (WBS) to the project has been explained in detail in a previous article. Please review that article for comprehensive instructions. For this article, I will be skipping those steps.

WBS Template used for this project

• Quotation status is confirmed

Create Project Contract

Note: A project contract can be created, or an existing one can be linked by following the procedure for transferring a quotation to a project.

To create a new contract, Go to Project management and accounting > Projects > Contracts > +New

1. Create Project from Quotation

• Quotation > Follow up > Modify > Transfer to project
• Click Next
• Select ‘New Project’ > Next
• Choose Project group, Select or Create Project Contract, Click Next

• Choose Forecast model
• Click Finish

Create Project and WBS

• The project is automatically created from the quotation, and the Work Breakdown Structure (WBS) is also transferred from the quotation to the project.

PROJECT:

• Assign Project Responsible (Optional)

WBS:

• WBS Copied from Quotation to Project
• Click on Project > Plan > Activities > Work Breakdown Structure
• Publish WBS (Modify WBS if required)

Create Project Forecasts and Budget

Setup Forecast

• Since we have enabled the transfer of quotation transactions, project transactions have been created.
• Navigate to Project > Action tab: Plan > Forecast > All forecast to view or modify forecast transactions.

Setup Budget

• Turn on Budget control manually or default from Project management and accounting Parameters
• Plan > Budget > Project Budget
• Action Pane Import > Import to Project Budget > Source Type: WBS Estimate > Select Forecast model > OK
• WBS budget Submit to workflow

• Budget status changed to ‘Approved’ after workflow approval

• Budget Balanced are added: Action Tab: Budget > Related Information > Project Budget Balances

Assign Worker and Category

Note: I am skipping this step. The following content is from a previous article. Please feel free to assign resources as needed.

Assign Resources

• Assign Resources allows you to allocate specific resources (such as employees or equipment) to a project. By assigning resources, you ensure that the necessary personnel and tools are available to complete the project tasks. This step is crucial for resource planning and management, ensuring that the right resources are assigned to the right tasks at the right time

Assign Categories

• Assign Categories is used to assign project categories to various transactions within the project. Project categories help in classifying and managing different types of project costs and revenues, such as labor, materials, and expenses. Proper categorization is essential for accurate project accounting and reporting

Other:  Setup Project Contract Billing Rules

• Go to Project > Fast Tab: General > Customer > Project Contract ID > Select

• Under Project Contract > Fast Tab: Billing Rules > +Add

• Setup Billing Rule (Milestone based)

• Change Project status to In Progress: Action Pane: Project > Maintain > Project Stage > In Progress > Save

Execute Project

Manage WBS

• Manage WBS (Work Breakdown Structure) stage under the Execution stage of the project lifecycle refers to the process of overseeing and updating the detailed breakdown of the project’s tasks and activities during the execution phase.

It involves:

1. TASK MANAGEMENT

• Ensuring that all tasks outlined in the WBS are being executed as planned. This includes tracking progress, updating task statuses, and making adjustments as necessary
• Go to Project > Action tab: Plan > Activities: Work Breakdown structure

2. RESOURCE ALLOCATION (Optional)

• Managing the assignment of resources to various tasks within the WBS. This ensures that the right resources are available and utilized efficiently
• I am skipping this part. Follow Previous article

3. MONITORING AND CONTROL

• Continuously monitoring the progress of tasks against the project plan. This involves identifying any deviations from the plan and implementing corrective actions to keep the project on track
• Cost and Time Tracking: Keeping track of the time and costs associated with each task in the WBS. This helps in maintaining budget control and ensuring that the project stays within its financial constraints.
• Go to Project > Action tab: Plan > Activities: Work Breakdown structure > Action pane: Tracking View

EFFORT TRACKING

COST TRACKING

4. COMMUNICATION AND REPORTING

• Regularly communicating the status of the WBS to stakeholders and providing updates on the project’s progress. This helps in maintaining transparency and ensuring that everyone is informed about the project’s status

Record Work

ADMIN RECORD HOURS FOR INITIATION STAGE

• Action Tab: Journals > Hours
• Click +New to create hour Journal Header and Go to Lines
• Add appropriate line details > Post

• Posted transactions are available on posted transaction screen (Project > Action tab: Manage > Related information: Posted transactions)

• Verify Voucher transactions

Manage Project Budget and Forecast

Manage Budget

• Track Budget balance – Go to Project > Action Tab: Plan > Budget: Project Budget > Action Tab: Budget > Related Information: Project budget balance

COST

REVENUE

• New Revision: This button allows you to create a new budget revision. When you need to update or adjust the project budget due to changes in project scope, costs, or other factors, you can use this button to initiate a new revision process. Check Previous Article
• Revisions: This button provides access to a list of all previous budget revisions. It allows you to review the history of changes made to the project budget, ensuring transparency and traceability of budget adjustments. Check Previous Article

Manage Forecast

• Manage Forecast stage is essential for updating and overseeing financial projections as the project progresses. This involves adjusting forecasts based on actual performance, monitoring costs and revenues, ensuring efficient resource allocation, conducting variance analysis to identify and address discrepancies, and communicating updated financial information to stakeholders. By managing forecasts effectively, project managers can maintain financial control and ensure the project remains on track. Check Previous Article.

Procure Product and Services

• This step is out of scoped for this project.

Process Project Invoices

• Mark Milestone 1 Completed
• Go to Project Contract > Action Pane: Maintain > Process > Manager Contract Status

• Click Update Milestone Status > Check Milestone > OK

• Go to Project > Manage > Invoice Proposal
• Make cost changes here if required All billable activities are listed on the invoice proposal. Select all items and make any necessary cost adjustments here.

• Post Invoice Proposal

• Invoice Journal records all posted invoices – Go to Project > Action Tab: Manage > Bill > Invoice Journals

• Verify Voucher Transactions

Recognize Revenue & Capitalize costs

Revenue Recognition:

• Recording the revenue earned from the project based on the work completed. This ensures that the financial statements accurately reflect the project’s progress and earned income
• Go to Project > Action Tab: Process > Revenue Recognition
• Click +New
• Click OK

• Click Cost Recognition

• The automatic completion method calculates the percentage of completion based on the contract value and accrued revenue. However, in this case, I want to mark the project completion at 40%, so I am choosing the manual completion method.

• Post Cost Recognition

Note: As this Completion contract project, No revenue has been recognised and transactions haven’t hit to ledger

Note – The original Percentage complete can be found on Contact status page

Capitalization of Costs:

• Identifying and capitalizing costs that are considered assets, such as equipment or development costs, which will provide future economic benefits. This helps in accurately tracking and reporting the project’s financial health
• Not Applicable for this project

Close

The Close step of the project execution stage serves several important purposes:

1. Finalization of Transactions: It ensures that all transactions related to the project, such as time entries, expenses, and invoices, are recorded and finalized

FAST FORWARD AND I HAVE POSTED REMAINING PROJECT TRANSACTIONS

2. Read-Only Status: Once the project is closed, it is set to a read-only status, preventing any further modifications or additions. This helps maintain the integrity of the project data

RUN ELIMINATION AND CLOSE PROJECT

• Eliminated entry

3. Financial Reconciliation: The close step allows for the reconciliation of all financial aspects of the project, ensuring that all costs and revenues are accurately accounted for

4. Reporting and Analysis: Closing the project enables the generation of final reports and

Analyze Project

Analyze Cash Flow

• This stage involves examining the cash inflows and outflows associated with the project. It helps in understanding the project’s financial health, ensuring there is enough liquidity to cover expenses, and identifying any potential cash flow issues.
• Project > Action Pane: Control > Statement > Cash Flow

Check Previous article to know purpose of each field on this report.

Review Costs

• This stage focuses on evaluating all costs incurred during the project. It ensures that the project stays within budget and helps identify any areas where costs can be optimized or reduced
• Project > Action Pane: Control > Control > Cost Control

Check Previous article to know purpose of each field on this report.

Analyze Performance

• This stage involves measuring various project metrics to determine if the project is meeting its objectives. It includes tracking key performance indicators (KPIs) such as schedule adherence, budget compliance, and overall project progress
• Project > Action Pane: Control > Statement > Project Statement

Check Previous article to know purpose of each field on this report.

Review Invoices

• This stage ensures that all invoices related to the project are accurate and have been processed correctly. It helps in verifying that all billable work has been invoiced and that there are no discrepancies
• Project > Find Project Contract > Action Pane: Maintain > Bill > Invoice Journal

Analyze Utilization

• This stage examines how effectively project resources, such as personnel and equipment, have been utilized. It helps in identifying any underutilization or overutilization of resources, ensuring optimal productivity and efficiency

HOUR UTILIZATION

• This button provides a detailed view of how many hours each resource has worked compared to their available hours. It helps in tracking the actual hours logged by team members against their allocated hours, allowing project managers to monitor workload distribution and identify any over- or under-utilization of resources
• Project > Action Pane: Control > Utilization >Hour Utilization

RESOURCE UTILIZATION

• Resource Reservations: It allows you to view and manage the reservations of resources for various tasks and projects. It helps ensure that resources are allocated efficiently and are available when needed

• Resource Reservation Analysis – Resource: This analysis focuses on individual resources, providing insights into how each resource is being utilized. It helps in identifying any underutilization or overutilization of specific resources, allowing for better resource management

• Resource Reservation Analysis – Project: This analysis provides a project-level view of resource utilization. It helps in understanding how resources are allocated across different projects, ensuring that resources are used effectively to meet project goals

• Resource Reservation Analysis – Role: This analysis focuses on the utilization of resources based on their roles. It helps in assessing whether specific roles are being effectively utilized and can assist in planning future resource needs based on role requirements

Conclusion

Implementing the Completed Contract Revenue Recognition method in Dynamics 365 Finance ensures that revenue is recognized only upon full project completion, providing financial conservatism and compliance with regulatory requirements. This approach allows businesses to track project costs effectively, maintain WIP accounting, and ensure accurate revenue postings at the end of the project.

By deferring revenue recognition until the project is finalized, organizations can eliminate financial risks associated with premature revenue posting, ensuring financial statements reflect a true and accurate picture of project profitability. With automated WIP tracking, milestone-based invoicing, and structured ledger postings, Dynamics 365 Finance streamlines revenue recognition while maintaining compliance with accounting standards.

By implementing best practices such as consistent project coding, structured financial workflows, and regular cost reconciliations, businesses can enhance their Fixed Price Project accounting processes. With Dynamics 365 Finance, organizations gain a reliable framework for managing large-scale projects efficiently, ensuring transparency, accuracy, and financial stability.

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