Engineering businesses delivering work under contract, over time.
Where revenue is recognised over the life of a contract, the figure rests on the estimated cost to complete. That estimate is updated each period, and a contract that has moved into loss must be provided for as soon as it is identified.
Advances, retentions and variation orders complicate the picture. A variation that has been performed but not yet approved is a receivable whose recoverability has to be assessed, not assumed.
Accounting and reporting
- Contract revenue recognition and the estimate of cost to complete
- Work in progress, unbilled revenue and amounts billed in advance
- Allocation of direct and indirect costs to projects
- Onerous contracts and the provision for expected losses
- Warranty obligations, liquidated damages and claims
Regulatory
- GST on works contracts and on supplies of goods and services, and credit on materials and subcontracting
- Tax deduction at source on subcontractor payments
- Cost records and cost audit for companies in specified industries, where the conditions are met
Internal controls
- Project budgets compared against actual cost, with variances explained
- Approval of subcontractor bills and of variation orders
- Controls over materials held at project sites
- Certification of work done before billing
Questions that arise
- Is the estimate of cost to complete reviewed and revised each period?
- Are loss-making contracts identified and provided for as soon as they are known?
- Are retentions, advances and unapproved variations assessed for recoverability?
- Is site material reconciled to consumption on the project?