How to Calculate Cost Recovery


Cost recovery is an accounting method in which you only recognize revenue once you have recouped your initial costs. This is one of the most conservative forms of revenue recognition, as it means you won’t see any profit until you have actually received payments from your clients. It is most likely to be used in situations where it is not certain that you’ll receive the full amount for which you have invoiced a client.

For example, if you sell products that you know will only be purchased once a year, you can use the cost recovery method to make sure you’ve earned enough to cover your expenses for the entire year. This method also works well if you’re selling on credit, as it allows you to defer taxes until your customers have paid their debts in full.

EPA’s accounting systems track the amount owed by PRPs in order to determine how much EPA needs to seek in court. As a rule, EPA sends demand letters to the PRPs before filing in court to ensure that they have a chance to pay for the cost of cleanup activities. If the demand letter is not paid, EPA will file in court and begin accruing prejudgment interest on the amount it is seeking.

The first step in calculating your total project costs is to add up all the items you need to purchase to complete the work. This can include things like the costs of labor, supplies, subcontractors, equipment and software. Then, divide your total project costs by your total gross revenue to generate your expense recovery ratio. This metric will help you see how successful your project has been and whether or not it has met its financial goals.

Another way to calculate your expense recovery ratio is to compare the actual costs of a project with the projected or estimated cost of the project. If the actual costs are lower than the projected or estimated cost, your project has been successful financially and you can consider it to be a success. If the actual costs are higher than the projected or estimated cost, you’ll need to look into why this happened and consider ways to reduce future project costs.

You can measure your project’s success by looking at both hard savings and soft savings. Hard savings are tangible benefits, such as reduced operating costs or cash outflows, that get reflected on the financial statements. Soft savings, on the other hand, are intangible benefits, such as the ability to avoid a potential future cost.

It’s important to keep in mind that any items you spend beyond the amounts that you can recover through your expense recovery methods should be recorded as external cost recovery expenses. These should be recorded in the fiscal period in which they occur. If you have restricted funding that includes an expiry date (as most research awards do), billing for the goods or services after the expiry date is a violation of the award term and should be avoided where possible.