Understanding Time vs. Output-Based Revenue Recognition

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Time-based methods can also include pro rata by days or months, which allows for partial-period recognition. But what matters is that performance must be uniform. If customers receive different benefits at different stages, or if cost-to-serve varies significantly across the term, time-based methods become less appropriate.

Output-Based Methods: When Milestones Matter More Than Time

Output-based revenue recognition shifts the focus from the calendar to the customer. Instead of asking, “How long has the contract been active?” we ask, “What portion of the deliverable has been completed?” This method is common in industries with discrete deliverables—professional services, construction, R&D services, or multi-stage implementations.

Output measures can be tied to units delivered, milestones achieved, data processed, modules completed, or customer-defined checkpoints. In one company, we provided onboarding services with five defined phases. Each phase was tied to a specific outcome: system integration, workflow configuration, user training, testing, and go-live. Recognizing revenue upon the completion of each phase matched both the contract and the customer expectation.

This approach introduces complexity. It requires rigorous documentation of milestones, objective evidence of completion, and a reconciliation of effort to outcome. But for many firms, it more accurately reflects how performance obligations are satisfied.

Choosing Between the Two: The Substance Test

ASC 606 allows for revenue recognition over time when one of three conditions is met:

1. The customer simultaneously receives and consumes the benefit as you perform (e.g., cleaning services).
2. Your performance creates or enhances an asset that the customer controls as it’s being created (e.g., construction on customer-owned land).
3. Your asset has no alternative use, and you have an enforceable right to payment for performance completed to date (e.g., custom software).

If you meet any of these, then over-time recognition applies. The next step is to choose between time-based or output-based.

Here is where judgment matters. If your company provides software access, but also layers on service, training, or integration, then you must determine whether the services are bundled or distinct. And within the over-time framework, ask which measure best reflects performance: time or outputs.

For example, a med-tech firm I advised delivered data analytics services tied to the number of scans processed. The contract spanned twelve months, but performance varied. In months with higher scan volumes, the customer gained more value. Output-based recognition by scan delivered a more accurate revenue profile than time-based recognition.

The Risk of Using Time-Based as a Default

Auditors have become more critical of companies defaulting to time-based recognition without analysis. One firm recognized revenue straight-line for services that were front-loaded. The auditor challenged the pattern, noting that the customer received most of the value in the first two months. A switch to output-based revenue recognition required not only journal entries but also revised controls and documentation.

Defaulting to straight-line may simplify operations, but it can mask issues. It can overstate revenue in periods where service delivery lags, or understate it when customers extract value quickly. The resulting variance in margin and cash collection can confuse FP&A and damage credibility with lenders or acquirers.

Contract Language and Its Hidden Signals

Often, the right pattern becomes clear only after reading the contract. Does the contract reference deliverables or timeframes? Does it define specific milestones? Are payments tied to outputs or elapsed time? Are customer obligations explicitly stated?

In one Series C software firm, I reviewed a contract that appeared time-based at first glance. But buried in the appendix were milestone-based acceptance criteria. Once those milestones were satisfied, billing triggered. The customer had no obligation to pay until completion. That single clause reclassified the contract from time-based to output-based, affecting nearly $2 million in quarterly revenue.

This is why revenue recognition must involve both finance and legal. Misalignment between sales language and accounting assumptions creates avoidable risks.

When Hybrid Models Make Sense

Many contracts blend time and output elements. A SaaS subscription may run on a time-based model, but also include usage-based overages or implementation services. In such cases, you may have multiple performance obligations, each with its own pattern.

In one implementation I oversaw, we recognized the subscription portion straight-line and the implementation services by milestone. The challenge was ensuring systems and processes could handle dual patterns without manual intervention. We built a dual-schedule revenue model that reconciled monthly. It took effort to implement, but it prevented audit findings and improved forecast accuracy.

Hybrid models reflect operational reality. But they require discipline: separate SSP calculations, separate deferral schedules, and separate disclosures.

How Systems Must Support the Pattern

The most common operational failure I see is not in the judgment—it is in the execution. Companies choose the correct pattern but lack the systems to support it. Revenue schedules are built manually in Excel. Milestone completions are tracked in Slack. Contract terms are lost in PDFs. This introduces risk at scale.

Modern revenue automation platforms now offer tools to map revenue patterns at the line-item level. But they still require integration with billing, CRM, and project management tools. The best finance teams do not just document the policy. They ensure the policy is embedded in systems.

When I implemented a mid-market ERP at a Series D company, we included revenue pattern tagging at the order level. Each item in a contract had metadata indicating whether it followed time-based or output-based recognition. This data flowed through billing, recognition, and reporting. Auditors appreciated the clarity. Our team appreciated the efficiency.

How to Present the Pattern to the Board

CFOs must not assume that boards understand the nuance of revenue recognition. But they do understand the consequences. They want to know whether reported revenue reflects true delivery. They want confidence in forecasting. And they want to know how revenue recognition interacts with bookings, cash, and margin.

The best CFOs build simple narratives: “We recognize revenue over time because our service is uniform,” or “We recognize revenue by milestone to reflect customer-specific progress.” They back this with a revenue policy memo. They educate. And when recognition methods evolve—due to new contracts or products—they communicate early.

Revisiting Patterns as You Scale

What works at Series A may break by Series C. As products evolve, customer expectations shift. A one-size-fits-all revenue pattern no longer applies. That is why I advise reviewing revenue patterns quarterly. Ask whether your recognition method still matches delivery. Review new contract types. Talk to customer success and legal.

I once helped a company switch from purely time-based recognition to a mixed model as it added premium tiers with defined onboarding. The new model better reflected value delivery and enabled the company to justify higher ASPs and lower churn in board conversations.

Do not wait for an audit to force the change. Proactively revise your models to match reality.

Final Thoughts: Make Revenue Reflect Truth

Revenue recognition is not about smoothing the curve. It is about revealing the story. Time-based methods work when service is uniform. Output-based methods work when customer progress defines value. The best CFOs know the difference. They choose the method that best reflects how their company delivers value—not what flatters short-term optics.

In a world of complex contracts, evolving products, and high investor scrutiny, accurate revenue recognition is more than an accounting choice. It is a leadership signal. It says we know how our business works. We know how we serve customers. And we tell that story truthfully—through our numbers.