Booking of Material issued to Sub-contractor at construction site on free issue basis Options available –
1) Book the same as consumption on issue basis irrespective of actual consumption by the sub-contractor at site
2) Book the same as consumption only upon actual consumption by the sub-contractor
Option advisable – Option No. 1
Reasons for the advise –
- Whatever option is selected the same should be consistently followed whether we have one site or multiple sites. And it is very difficult to follow option 2 consistently.
- Actual stock lying with sub-contractor may not be available with accuracy. Hence it is advisable to book the same as consumption. Because the stock issued to sub-contractor may be lying in four stages – Consumed and billed, consumed and unbilled, consumed and debitable, unconsumed. And it is practically not feasible to track the material in this fasion moreso when you would have to disclose the stock records periodically to bankers and statutory authorities in returns.
- At each period end the stock issued would be subjected to material reconciliation. Whatever excess is issued should be debited to the sub-contractor. The practise of debiting the sub-contractor can be consistently followed only when we have booked the consumption at the point of first issue.
- All statutory authorities say Income Tax, VAT and Service Tax may like to verify the stock records. If the same does not physically tally with the stock in our godown, the same may create complexities in assessment.
- All major construction companies including L&T, Simplex, and real estate companies in general follow option 1.
- The issue of MIS preparation in construction sector is taken care by having proper method of WIP valuation, which takes care of such issues in the best manner. Hence advisable to track the value of such items under the construction activities.
- If the number of items are more and the sub-contractors are also more than one, the possibility of obtaining incorrect stock figures is not ruled out. Auditors also would normally object to such policy and may like to avoid taking third party stock certifications at each reporting period.
- Complexities would also arise in case of materials returned by the sub-contractors, when the same has not been booked as issue in the first instance.
- In ERP softwares since estimates are available and the WBS tasks are small enough, following option 2 will add overhead of few more processes with minimal or no gain.
- These are some of the reasons based on which we advocate clients to follow option 1.
- Option 2 is more suitable for the manufacturing sector in their job working transactions when the finished goods are to be returned by the job workers. But for the uncontrolled environment of the construction sector, where there is no possibility of return of finished work physically, the same is not advisable.