Recording penalties and contra charges a client deducts
How a contractor records penalties and contra charges a client deducts from a payment, whether it accepts them, disputes them or writes them off.
By Achekam · · 4 min read · For Construction businesses in South Africa, Nigeria, Kenya
The payment certificate says one thing; the money in the bank says another. Attached to the remittance is a short list: a penalty for late completion, a charge for site cleaning the client says you did not do, the cost of water and power from the client's meter, and a back-charge for a damaged kerb.
Some of those deductions are fair and agreed in the contract. Some are not. Either way the books must show what really happened, so that your debtors are right, your margins are right, and you can argue the disputed ones with facts. This article sets out how to record each kind in Achekam.
Penalties, contra charges and back-charges: what each one is
The words are used loosely on site, so pin them down before recording anything:
- Penalties (or delay damages): an amount per day or week the contract allows the client to deduct for late completion.
- Contra charges: the cost of something the client supplied to you, such as water, electricity, scaffolding, a crane or materials, deducted from what it owes you.
- Back-charges: the cost of work the client says it had to do or put right because you did not, such as cleaning, repairs or making good.
The contract decides which are allowed and how they must be notified. South African contractors will usually be working on one of the standard forms in the CIDB's list of endorsed forms of contract, which includes a guide to choosing between them; Nigerian and Kenyan contractors should read the deduction clauses in whichever form their client used. Pull out the relevant clause for each deduction before deciding what to do.
Recording the net payment against the invoice
Whatever you think of the deductions, record the money that actually arrived. In Achekam a customer payment is recorded against the invoice, and a part payment leaves the invoice part-paid.
Do not record the deductions as if they were payments. The balance left open on the invoice is exactly the amount deducted, and it is the amount you now have to deal with, deduction by deduction.
| Deduction | Accept | Dispute |
|---|---|---|
| Penalty under a clause you accept | Credit note | Leave open; write to the client |
| Contra charge for services the client supplied | Credit note, then reclassify to cost | Ask for the meter readings or hire records |
| Back-charge for remedial work | Credit note | Leave open; ask for evidence of the work |
Accepting a deduction: a credit note for the amount conceded
When you accept a deduction, issue a credit note from the invoice it relates to. A credit note in Achekam is always issued from the invoice it corrects, in full or for chosen lines, is posted to the ledger, and can be downloaded as a PDF or e-mailed. Any leftover credit is held for the customer. Send the credit note to the client so their records and yours agree.
A credit note reduces sales. That is correct for a penalty, which really is a reduction of the contract price. For a contra charge, where the client supplied you water, power or a crane, the deduction is really a cost to you. Ask your accountant whether to move it from sales to the right cost account with a manual journal, so your gross margin reads correctly. Achekam refuses an unbalanced journal or one dated in a closed month, and a posted journal is corrected only by a reversal.
Disputing one: leaving the balance open and following it up
When you dispute a deduction, leave the balance open on the invoice. It will age: receivables are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. That ageing is a fair picture, because the client is withholding money you say is owed.
Write to the client the same week, citing the clause, the facts and the amount. Then send a statement of account every month: the server produces it as a PDF that can be e-mailed, and the screen tells you whether it was sent. Each statement keeps the disputed balance in front of the client's accounts team. Disputes often end in the final account, which reconciling to the final account covers.
Writing off what will not be recovered, with approval
Some disputes are lost or simply not worth pursuing. When you decide a balance will not be recovered, write it off. In Achekam an unpaid debt can be written off once a partner approves it, which keeps the decision with someone senior and on record. Note the reason, the clause and the correspondence on the write-off. Law firms deal with irrecoverable fees the same way; writing off irrecoverable fees shows it in another setting.
Contra charges for materials or services the client supplied
Contra charges deserve a routine of their own, because they repeat every month on a long job:
- Ask the client at the start of the job which services it will charge for, and at what rate.
- Read the meters yourself on the same days the client does.
- When the deduction arrives, check it against your readings and the agreed rate.
- Accept what matches with a credit note and a reclassification to cost; dispute the rest.
- Keep the readings and the client's calculation with the month's claim.
Before the next remittance
Set up a one-page deduction log per job: date, type, clause, amount, accepted or disputed, and how it was recorded. When a certificate itself comes in below your claim, rather than a deduction being made after it, the treatment is different; when the payment certificate is less than you claimed explains that case.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
