Cost recovery is a type of revenue recognition method that allows you to recognize profit when there’s an uncertainty about whether you’ll actually receive the money you’ve invoiced. This is a conservative way of accounting, and it’s only used in certain situations. It’s usually paired with an installment sales method to help you keep track of payments coming in, and it can also be a great tool to use for deferring taxes.
You can calculate rate-recovery charges either using one single rate to cover both owning and operating costs or two separate rates, depending on the structure of your agreement with your customer. If you’re charging your customers for only the actual days or hours they’ve deployed on site, then it’s easiest to calculate cost-recovery charges using a single rate. However, if you’re charging for a fixed number of days or weeks, then you’ll probably need to break down your costs and charge for each component individually.
The purpose of the cost recovery system is to ensure that you’re recouping all your expenses from your customers. This isn’t always an easy task, since many customers will dispute your claims or try to find ways around paying you. You can combat this by ensuring that you’re documenting all the fees, overhead costs, and other expenses that you’ve incurred. You can then submit these documents to the customer to show that you’ve been transparent about your pricing.
EPA tracks the amount owed by PRPs in its accounting system and updates it periodically to reflect additional cleanup work conducted, legal costs incurred by EPA and DOJ, and interest accrued on the amount owed. Eventually, if the amount is not paid by a PRP, EPA will seek to recover these expenses through a lawsuit.
To calculate your project costs, start by assessing the total amount of money you’ve spent on each project. This includes everything from your staff’s salaries to the equipment, hardware, and software you’ve purchased for each project. Once you have a list of all the expenses, subtract your operating income from that total to get your projected profit. This will help you determine if you’re making money on each project and will give you a clear idea of which ones are profitable and which aren’t.
While using the cost recovery method of accounting may sound like a good idea, it’s important to remember that you’re violating the realization principle by deferring taxes on your profits until you’ve received the cash from your client. This is a risky strategy that can backfire, and you should consult an accountant for more advice. Our team at Deskera Books isn’t certified in income tax or accounting, so we can’t offer advice beyond our support services. However, if you’re looking for a powerful accounting, invoicing, and inventory management solution, we recommend you try out our Deskera Books software. Its easy-to-use interface makes tracking your business a breeze. You can create invoices, record expenses, and view all your financial documents anytime you want, from anywhere in the world.