Explore project contract capabilities

Completed

Contoso has been manufacturing and selling bikes to individuals and organizations for five years. This month, a local government agency launched a tender for the provision of a branded e-bike rental program. Contoso and its partners would be a perfect fit for such a project. You will need to work with your partners at Proseware, Inc., who will provide the docking stations, and with Northwind Traders for payment processing.

The type of project you create for a project contract determines the method used to invoice project customers. You can change a project contract and the related project, but you cannot change the project type.

By using a project contract, you can invoice one or more projects at the same time. The project contract also helps guarantee a consistent invoicing procedure for every subproject in a project structure.

Every project that will be invoiced must be associated with a project contract. The settings for a project contract apply to all projects and subprojects that are associated with that project contract.

A project contract can specify one or more sources of funding. Therefore, you can split the billing among multiple funders, set up funding limits so that funding sources are not billed more than a specified amount, and configure funding rules for charging expenditures.

Funding for project contracts

Some project contracts specify that multiple parties share the responsibility for funding the project costs. Here are some examples:

  • A large customer that has multiple divisions requests that funding of a project be split by division.

  • Your company shares the costs of a large project with an external organization.

  • A road project is co-funded by two municipalities.

  • A bridge project is funded by a government grant and a private corporation.

In Dynamics 365 Project Operations, you can split the billing for a single transaction or an entire project among multiple customers, grants, or organizations.

In some project contracts, multiple parties may share the responsibility for funding the costs of the project. In a company, multiple divisions may want to have the funding of a project, split between the numerous divisions associated with the project. Projects where multiple parties contribute to the funding of an advanced funding project are called funding sources. After a customer, organization, or grant is defined as a funding source, it can be assigned to one or more funding rules. Funding rules contain the criteria that determine how charges are allocated to the various funding sources for a project.

Because stocked items, such as those that appear on purchase requisitions and purchase orders, cannot be split, the cost amount cannot be split among multiple funding sources at the time of distribution. Therefore, the funding source value remains 0 (zero) until the inventory issue is posted. When the inventory issue is posted, the cost amount is distributed according to the account distribution rules for the project.

Here are some steps you can take to make it easier to split the billing among multiple funding sources:

  • Specify that all transactions that are entered for a project use the same sales currency as the project contract.

  • Set up funding limits, so a funding source is not invoiced more than a specified amount toward a project.

  • Configure funding rules and funding limits for each worker, item, category, category group, and transaction type (or for all transaction types).

  • Select optional start and end dates to define the period when each funding rule is valid.

  • Specify the percentage that each funding source is responsible for.

  • Specify which funding source is responsible for rounding differences that are caused by funding allocation calculations.

  • Set up rules that determine how project costs are invoiced to external customers and charged to internal organizations.

  • Record transactions in an on-hold funding account until additional funding can be obtained, or until you decide to bear the costs internally.

To determine which tax group to associate with a transaction, the project is searched for a tax group assignment. If no tax group assignment has been made at the project level, the project contract is searched.

Example: Multiple funding sources (simple)

The following table provides scenarios for managing funding allocation among multiple funding sources. These scenarios are based on the following assumptions:

  • Priority settings are factored into the allocation of funds before other funding rule criteria are applied.

  • No date range has been specified to define the period when the funding rule is valid.

Scenario

Funding source

Allocation percentage

Allocation priority

You want to allocate costs to one funding source until its funds are exhausted, allocate costs to a second funding source until its funds are exhausted, and allocate the remaining costs to a third funding source.

  • Funding source 1
  • Funding source 2
  • Funding source 3
  • 100%
  • 100%
  • 100%
  • 1
  • 2
  • 3

You want to allocate 75 percent of costs to one funding source and 25 percent to a second funding source. When either of those funding sources is exhausted, you want to pay the remaining costs from a third funding source.

  • Funding source 1
  • Funding source 2
  • Funding source 3
  • 75%
  • 25%
  • 100%
  • 1
  • 1
  • 2

You want to allocate 75 percent of costs to one funding source and 25 percent to a second funding source. When either of those funding sources is exhausted, you want to split the remaining costs between a third funding source and a fourth funding source.

  • Funding source 1
  • Funding source 2
  • Funding source 3
  • Funding source 4
  • 75%
  • 25%
  • 50%
  • 50%
  • 1
  • 1
  • 2
  • 2

You want to allocate the first 25 percent of costs to one funding source and the rest to a second funding source.

  • Funding source 1
  • Funding source 2
  • 25%
  • 100%
  • 1
  • 2

Example: Multiple funding sources (complex)

You have three funding sources that you want to use in the following order:

  1. Use funding source 2 and funding source 3 equally until funding source 2 is exhausted.

  2. Continue to use funding source 3 until it is exhausted.

  3. Use funding source 1 after funding source 3 is exhausted.

To accomplish this goal, you must do the following:

  • Set up funding limits for funding source 2 and funding source 3, for their respective amounts.

  • Create the following funding rules:

    • Rule 1 (Priority 1): Allocate 50 percent of transactions to funding source 2 and 50 percent to funding source 3.

    • Rule 2 (Priority 2): Allocate 100 percent of transactions to funding source 3.

    • Rule 3 (Priority 3): Allocate 100 percent of transactions to funding source 1.

This setup works because transactions are checked against rules and limits to determine whether any of them apply to the transaction. If no specific rules or limits apply to the transaction, the All transactions rule applies. The All transactions rule matches all transactions.

If a rule is found that matches a transaction, the percentage that has been allocated in that rule is applied first, but only after the matches are checked against any limits that have been set up. If a limit has been met, and a funding source’s funds are exhausted, the funding rule that is associated with the funding limit is disregarded, and the program checks for the next rule that applies.

In some cases, only part of a transaction can be allocated under a rule. This might happen because a limit is reached when the transaction is allocated. In this case, only a certain amount is allocated according to that rule, such as 50 percent to each funding source. This is the case in rule 1, which is described earlier in this section. The remainder is allocated according to the next rule in the sequence.

The following table examines this scenario in more detail.

Focus

Details

Funding rules

  • Rule 1 (Priority 1): All transactions. Allocate funding source 2 at 50% and funding source 3 at 50%.
  • Rule 2 (Priority 2): All transactions. Allocate funding source 3 at 100%.
  • Rule 3 (Priority 2): All transactions. Allocate funding source 1 at 100%.

Funding limits

  • Funding source 1 limit = 10,000.00
  • Funding source 2 limit = 500.00
  • Funding source 3 limit = 750.00

Transaction 1

Transaction amount: 100.00

Funding: The transaction is paid according to rule 1 only, because the transaction is fully paid after rule 1 is applied. The transaction is funded equally between funding source 2 and funding source 3.

  • Funding source 2: 50.00
  • Funding source 3: 50.00

Transaction 2

Transaction amount: 5,000.00

Funding: The transaction is paid according to all three rules.

Rule 1

  • Funding source 2: 450.00
  • Funding source 3: 450.00

Rule 2

  • Funding source 3: 250.00 (= 750.00 – 50.00 – 450.00)

Rule 3

  • Funding source 1: 3,850.00 (= 5,000.00 – 450.00 – 450.00 – 250.00)

Total funds that are distributed for each funding source

  • Funding source 1: 3,850.00
  • Funding source 2: 500.00
  • Funding source 3: 750.00

Create projects

You can create six types of projects in Finance. Each project type is set up differently for costs and revenue recognition. The project type that you choose depends on the purpose of the project. The following table describes the typical use of each project type.

CREATE PROJECTS

Project type

Description

Time and material

In Time and material projects, the customer is billed for all costs incurred on a project. These include costs for hours, expenses, items, and fees.

Fixed-price

In Fixed-price projects, the invoices consist of on-account transactions. A Fixed-price project is invoiced according to a billing schedule that is based on a project contract. Revenue for a Fixed-price project can be calculated and posted throughout the project by using the completed percentage method. Alternatively, revenue can be calculated and posted when the project is completed by using the completed contract method. Companies can often benefit from using the value of the work in process (WIP) to calculate the degree of completion of a project or group of projects.

Investment

Investment projects are those that don't produce immediate earnings. They are typically used for long-term internal projects where the costs must be capitalized. Only costs for items, hours, and expenses can be recorded for an Investment project. Costs in an Investment project are tracked and controlled by using estimate functionality. Investment projects can be set up with an optional maximum capitalization. As an Investment project progresses, you record its costs in WIP accounts, where the costs are held until the project is completed. When the project is eliminated, you transfer the WIP value to a fixed asset, a ledger account, or a new project.

Note

Transactions on Investment projects aren't shown on the Post costs, Accrue revenue, or Create invoice proposals page.

Cost project

Like Investment projects, Cost projects are typically used to track internal projects, and only hours, expenses, and items can be recorded for them. However, Cost projects are usually of shorter duration than Investment projects. Additionally, unlike Investment projects, Cost projects can’t be capitalized to balance sheet accounts. Instead, their project transactions are posted only to profit and loss accounts.

Note

Transactions on Cost projects aren't reflected on the Post costs, Accrue revenue, or Create invoice proposals page. Because cost projects are typically used to track internal projects, they don't usually have to be associated with a customer account. However, if your setup requires that item requirements be created for purchase orders, you must associate the Cost project with a customer. This association is required, because item requirements are managed as sales order lines, and the system requires that a customer be specified. However, this setup won't cause item requirements to be created automatically from a purchase order. For Cost projects, the Create item requirement setting is ignored. If you need an item requirement in a Cost project, you can create it manually, if a customer is associated with the project.

Internal

Internal projects are used to track costs on a project that is internal to your organization. Internal projects can provide a planning tool to manage resource consumption.

Note

Transactions on internal projects aren't reflected on the Accrue revenue or Create invoice proposals page.

Time

Time projects are used to track time that is associated with non-chargeable and non-productive activities, such as a project to track sick time for workers. Transactions in Time projects aren't posted to the ledger. Instead, they are included in worker utilization reports. Only hour transactions can be recorded in Time projects. You use an hour journal or time sheet to register these hours to the project. After the hours are registered, they appear as project transactions but don't have corresponding voucher transactions.

Note

Transactions on Time projects aren't reflected on the Post costs, Accrue revenue, or Create invoice proposals page.

Billing rules

After you set up the project contract and the project, you can set up billing rules for the project. Billing rules are based on the project terms that are specified in the project contract.

The billing rules that you can create depend on the terms of the project contract and the project type, such as time and material or fixed-price, that you associate with the billing rule. You can create more than one billing rule for a project contract. You can also assign a billing rule to multiple projects that are associated with the same project contract and have similar billing terms.

You can set up the following types of billing rules:

  • Unit of delivery – Invoice a customer when you complete a unit of delivery. You define the units of delivery in the contract.

  • Progress – Invoice a customer when you complete a specified percentage of the project. You can set up a billing rule to automatically calculate the percentage of work completed, or you can manually calculate the percentage of work completed and the amount to invoice the customer.

  • Milestone – Invoice a customer for the full amount of a project milestone when the milestone is reached.

  • Fee – Invoice a customer for your services plus a management fee, which is typically a percentage of the cost of services.

  • Time and material – Invoice a customer for the value of time and materials that are used on a project.

For all types of billing rules, you can specify a retention percentage that is deducted from customer invoices until a project reaches an agreed-upon stage. The payment retention percentage is specified in the project contract. The amount is calculated based on, and subtracted from, the total value of the lines in a customer invoice.

For Time and material and Progress billing rules, you can assign chargeable categories. Chargeable categories indicate the transactions that should be included in customer invoices.

When you are ready to invoice the customer, the amount to invoice for the project is calculated based on the billing rules, and a project invoice proposal is generated.