Contract revenue and variations on their own accounts
How the Construction pack posts contract works and variations to separate revenue accounts, from an accepted quotation to the invoice line.
By Achekam · · 5 min read · For Construction businesses in South Africa, Nigeria, Kenya
Launching soon. The Industry CRM add-on described in this article is launching soon. This article describes it as it will work at launch.
At year end your accountant asks what sounds like a simple question: how much of this year's turnover came from variations rather than the original contracts? If every invoice went to one sales account, the honest answer is that nobody knows without going back through each invoice by hand.
The answer matters. Variations often carry a different margin from tendered work, a steady rise in them can mean scope is being under-priced at tender, and a client relationship that produces more variations than contract work is worth understanding before the next bid.
The Construction & contracting pack in Achekam's Industry CRM keeps that split from the start, by posting contract work and variations to their own revenue accounts. This article explains how.
The starter catalogue in builder's terms
When the pack is switched on, it brings a starter catalogue of the items contractors invoice most:
- Contract works: the measured work in the contract, valued as the job progresses.
- Preliminaries and generals: the site establishment, supervision, scaffolding and other running costs of the site.
- Retention release: the retention the client held back, invoiced when it is released.
- Variations: changes to the contract work, priced and agreed separately.
- Daywork labour and plant: work charged on time and equipment rather than measured quantities.
Each item posts to one of two accounts: Contract revenue (4370) or Variations and extras (4380).
Why two revenue accounts make a difference
With contract revenue and variations on separate accounts, the income statement shows them as separate lines. That gives a contractor three things it cannot easily get otherwise:
- a clear view of how much of the year's work came from changes rather than the tendered scope;
- a basis for checking whether variations are priced at the margin the firm intends;
- figures the accountant can use when preparing the annual financial statements, without a reclassification exercise at year end.
Achekam's management accounts add up an income statement for a chosen period beside the period before, and a balance sheet at period end, from the business's own journals. With the two accounts in place, the variation figure is simply there. How that revenue is recognised over the life of a contract is a question for your accountant; Investopedia's explainer on the percentage of completion method shows how construction and other long-term contracts recognise revenue as work progresses, with worked examples and the risks of the method.
What switching the pack on adds to your books
Every business on Achekam has its own double-entry ledger with a standard chart of accounts, and accounts can be added, renamed or switched off. Switching on the Construction pack adds the industry's revenue accounts to that chart and its unpriced starter items to the catalogue.
One check is worth doing first. If an account code the pack needs is already used in your chart for another type of account, the activation is refused and the clash is named. Nothing is switched on until the clash is sorted out, so an account already in use keeps its place in your books. If you see that refusal, ask your accountant to move or renumber the clashing account, then switch the pack on again.
From an accepted quotation to a draft invoice
In the Industry CRM, a customer can accept a quotation on a link by typing their name and ticking a box. The acceptance drafts the invoice in receivables, so the office does not retype what the client agreed. The customer's IP address and browser are kept with the acceptance, and a quotation that has been sent is frozen, so any change goes out as a revision.
The invoice stays a draft unless the business has decided otherwise. Issuing it at the moment of acceptance needs an administrator's recorded authority, which keeps the decision to bill with someone accountable for it.
Invoice lines that name the account
On the invoice, each line names the revenue account and the product it sells. When a contractor bills a month's contract works and an agreed variation on one invoice, the contract works line posts to Contract revenue and the variation line posts to Variations and extras, in the same journal.
Where an item sold has a cost recorded against it, cost of sales is posted in that same journal too, so the revenue and its cost arrive in the books together instead of being matched up later.
Pricing the items yourself
No starter catalogue item in any industry pack carries a price. Your rates for preliminaries, daywork labour and plant depend on your region, your crews and your equipment, and nobody else's figure would fit. Set your prices before the first quotation goes out, and review them whenever your cost base moves.
It also helps to agree, before the first invoice, which item each kind of work goes on. Decide in the office that a change the client instructs always goes on the variations item, however small, and that daywork is used only where the work was genuinely recorded on time sheets and plant returns. Consistency is what makes the two revenue lines worth reading: if half the variations are billed as contract works, the split tells you nothing.
A short set-up checklist
- Ask your accountant to look at your chart of accounts for codes that could clash with the pack's revenue accounts.
- Switch the pack on and confirm the two revenue accounts appear.
- Price the starter items that you use, and leave aside those you do not.
- Decide who holds the authority to issue an invoice at the moment of acceptance, if anyone.
- After the first month, check the management accounts show contract revenue and variations on separate lines.
Good revenue records start with good buying and payroll controls on the cost side, covered in requiring several quotes on big purchases, recording part deliveries to site and stopping ghost workers and bank detail fraud.
Ask your accountant this month which accounts your construction income should land on, and set the pack up to match.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
