What are invoices in construction companies ?

What are invoices ? very simply they are bills that are peculiar to construction companies . The contract is any unfinished product that is achieved on stages and the contractor is paid after presenting an invoice . For example if we want a carpenter to make a bedroom , he has to present an invoice for each finished stage then he presents the final statement and obtains all his money . 
 

Types of invoices :

Invoices in construction companies are divided into two types : 

1.  General contractor invoice ( revenue invoice ):

It is presented from  the general contractor to the owner who in turn checks it then  the general contractor receives his payments for the achieved work .

      ( B) subcontractor invoice ( expenses invoice ) :

It has the same form of the general contractor invoice but it is presented from the subcontractor to the general contractor who checks it and then the subcontractor receives his contractual amount for the achieved work .

Thus there are 3 parties ( owner - general contractor - subcontractor ).

Their relation is as follows :

 

The owner deals with the general contractor only .

The general contractor deals with both the owner and the subcontractor .

The subcontractor deals with the general contractor only .

In order to simplify this we have an example . the owner here is the Educational buildings authority , the general contractor is the “Arab Contractors Company“  

And the subcontractor is a small construction company specialized in just one item which is marble installation and finishing  ( El Reda construction company )

The tender advertisement was in El-Ahram newspaper as follows  :

      Tenders 

Educational buildings  authority is inviting a tender for building “ El-Maady secondary school for boys “. according to the technical and financial conditions included in the tender specifications which cost 2000 pounds ( unrecoverablr ).

1% is a  primary insurance value recovered in the case of not allocating  the tender and raised to 5%  as a final insurance in the case of  the allocation of the  tender to  the company . to participate , please buy the tender specifications  and complete the financial and technical documents before 15/10/2020.

   

So a lot of companies bought the tender specifications and paid the primary insurance either via cash or bank and they prepared their documents to participate in the tender . At last the authority met for the opening session and the committee figured out that  “Arab Contractors Company“ has  the least pricing offer and the highest quality . 

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Here we have to explain :

1 - primary  insurance :

It is an amount paid as a guarantee . It is usually 1% of the whole value and all the participating companies pay it . It is recovered in the case of refusal and it is called ( seriousness insurance ) .

2 - Final insurance :

It is an amount paid as a guarantee ( about 5% ) by the accepted company to accomplish the project . It is recovered on the project delivery and it is called ( performance bond guarantee ) .

 

Tender specifications

 

It is a notebook printed by the owner which includes  the financial and technical details of the project as well as the tables of quantities , duration , deductions concerning the project . 

As Soon as the tender is allocated to Arab Contractors Company“ , the site is holded to it by the owner . 

Assume that the gross value of the tender is 15,878,000 pounds and the duration is one year starting from 5 / 10 / 2020 and ending on 4 / 10 / 2021 . 

Because the company is busy executing other projects and the time is limited  , it decided to hire a subcontractor specialized in marble items . The subcontractor here  is El Reda company . 

At first the general contractor ( Arab Contractors Company ) asked the owner ( Educational buildings authority ) for an advance payment ( about 25% ) of the contractual value that is deducted from the coming invoices with the same rate . 

The owner issued a check with the value of 3969500 pounds . The accounting treatment will be in the general ledger as follows :

 

From	To
Bank	Advance payments ( clientsEducational buildings authority )

 

By January 2021, Arab Contractors Company achieved 30 % of the school constructions . Then it listed the work in an invoice ( current invoice 1 ) and sent it to the owner who checked it and added the relevant deductions as the following :

General contractor invoice 

 

Educational buildings authority 

Invoice no. 1      

project name : building “ El-Maady secondary school for boys .

General contractor  : Arab Contractors Company 

Duration : from 5/ 10 /2020 to 30/ 1/2021

                                            Quantity                                 price                    total

Service description                unit                                    expenses 

                                              Previous         total current     pound              pound 

1 - concrete buildings by flat meter   1m2              

 

-

1500

150000

900

90%

121500000

 

2 - building paintings by flat meter  1              m2

 

-

250

25000

1500

90%

33750000

 

3 - foundations digging  by linear meter            lm 

 

-

370

37000

3000

90%

99900000

 

Gross amount ( invoice 1 )                                                                   255150000

Added value  tax 5%                                                                               12757500

Business insurance deduction 5%                                                        127,575.00    

Advance payments deduction 25 %                                                      63787500                    

Accomplished work social insurance 3.6 %                                            9185400

Manufacturing and commercial profit tax deduction 1 %                         25515

Net invoice after deductions                                                                   179625600

 

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We notice that 

1 - Business insurance deduction 5%

It is a retained amount by the owner with the rate of 5% for the general contractor as a guarantee of the execution quality and it is recovered on delivering the project . 

2 - Advance payments deduction 25 % :

It is the amount received by the general contractor as an advance to cover cash liquidity and start the project . this amount is deducted from each individual invoice with 25 % .

3 - Accomplished work social insurance 3.6 %        

The social insurance of the working  labour in the project in order to guarantee their safety .

4 - added value tax 5 % :

It is a tax in Egypt on every cash transaction with the rate of 5% for constructions from the amount of each invoice and it is paid to the tax authority . In general most contracts include added value tax without the need to add it to the invoice .

5 - Manufacturing and commercial profit tax deduction 1 %  :

Which is a tax that is deducted from the invoice and the owner pays it to the tax authority .

Educational buildings authority ( owner ) issues a cheque of the accruals of the general contractor ( Arab Contractors Company ) of 1796256 pounds and the latter recorded it as follows :

Current invoice 1 entry   .Project :building “ El-Maady secondary school for boys .

 

From

To

1 - client ( Educational Buildings Authority ) 1,796,256.00.    2 - Advance payments 25% ( client Educational Buildings Authority - invoice 1) 637,875.00     3 - various debtors / business insurance - educational buildings authority     127,575.00        4 - operations costs / social insurance - educational buildings authority 9185400    5 - credit balance .   Manufacturing and commercial profit tax          2551500

1 - operations revenues ( current invoice 1/ building “ El-Maady secondary school for boys )  255150000       2 - added value tax authority ( current tax 1 /  El-Maady  school ) 12757500

 

In the coming article we will discuss the subcontractor invoice .