Pro-Rating

Term Definition
Pro-rating is the process of dividing or distributing proportionally. Pro-rating is a billing structure where the total amount of a project is divided and billed proportionally.

Professional service firms such as legal, high tech consulting, and accounting provide a scope of services that typically goes beyond providing the service for a fee. Clients of professional service organizations require a variety of non-standard billing structures such as pro-rating, split billing, cost plus billing and milestone billing. These billing structures also create a multitude of accountability requirements. Organizations require an effective way to tailor the billing to client and project needs, which also provides a clearer view of the organization's financial standing. The ability to manage complex billing processes such as proration, split billing is facilitated with automation. Time and billing systems cannot only improve billing efficiency but improve auditability.

For example, a billing system would allow you to create billing rules for
pro-rating. So in the time and billing system fixed rates would be defined using the following parameters: Start date, End date, Amount, Number of hours, and Prorating or Flat Charge options.

For example, let's assume one defines a fixed billing of $10,000 for 1000 hours of work from January 1st to January 9th. If someone associated to this rule works 5 hours on January 1st then:

Flat Charged Rate: The hourly rate from January 1st to January 9th will be, 10,000/5 = $2000 per hour, and the total rate will be, 2000 * 5 = $10,000.

Prorated Rate: The hourly rate from January 1st to January 9th will be $10,000/100 = $100 per hour, and the total rate will be 100 * 5 = $500.

If someone associated to this rule worked 200 hours on January 9th then:

Prorated Rate: The hourly rate from January 1st to January 9th will be $10,000/100 = $100 per hour. The rule would rate the first 100 hours of work done at a rate of $100 per hours. The remaining hours would be rated at $0. Therefore, the total rate would be 100 * 100 = $10,000.

Area of Application
Project Management

Related Terms
Time and Billing

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