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Project Accounting & Costing (PAC)

INDEX
Sl. Description Page
No. No
1) Meaning of PAC 3
2) Importance of PAC 4
3) Flow Chart of Basic Activities in Project Execution 5
4) Important aspect of Project Accounting & Costing 6
5) Project Accounting
a) Principles & Assumptions 9
b) Objectives of Accounting 9
c) Limitation of Accounting 9
6) Project Accounting Category
a) Purchase Accounting 10
b) Stores & Inventory Accounting 11
c) Account Payable 13
d) Cash & Bank Payments 15
e) Account Receivable 15
f) Capitalization of Fixed Assets 15
g) Taxation Accounting 15
h) Cash Flow 25
i) Trial Balance & Final Account 27
7) Codification of Accounting 33
8) Explanation of Important Terms 34
9) M.I.S. 37
10) Project Costing 39
11) Consequences 40
12) Role of Engineer's in PAC 41

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1.0) Meaning of PAC : Project Accounting and Costing can be defined as
under:-

i) Project : Project is an activity that has a beginning and an end which is


carried out to achieve a particular purpose to set quality within a given time
constraints and cost limits. It is considered as temporary process because
once the goal is achieved the project is completed. For this reason, the end
point of a project or objective needs to be defined at the very beginning of
the project to ensure successful completion. The reason some project
never end is because no one ever defines what constitute complete. Flow
chart of Project execution is enclosed.

ii) Accounting : Accounting is the system for gathering and recording


financial information for the purpose of preparing summary reports, for
analyzing the financial status of a business entity to make managerial
decision.

Accounting is not only the Debit/Credit Entry but also it covers the
accountability for each and every commercial activity being generated to
execute the project. It mean each and every commercial and financial
activity is to be recorded with justification by concerned department
working for a business unit.

iii) Costing : Costing is a system that identifies activities in a organization and


assigns the cost of each activity resource to all products services according
to the actual consumption. In this way an organization can establish the
true cost of its individual products and services for the purpose of
identifying and eliminating those which are unprofitable and lowering the
prices of those which are overpriced. It is generally used as a tool for
understanding product and customer cost and profitability. It is used to
support strategic decisions such as pricing, outsourcing and identification
and measurement of process improvement initiatives.

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2.0) Importance of PAC:

i) Profitability : Main objective to run a project by any company is to earn


profit and to know whether project is earning profit or loss. This can be
correctly ascertained by Project Accounting & Costing only.

ii) Management & Statutory Requirement : Project accounting and costing


is not only essential for management but also mandatory to fulfill the
requirement of different Acts prevalent in India such as Cos Act, Income
Tax Act, Central Excise and Custom Act, VAT Act, SEBI Rules, FEMA etc.
Accordingly, PAC has become the statutory requirement. In case of failure
in fulfilling the statutory requirement of different Acts there are numerous
penal provisions and interest liability on the company.

iii) Decision : Decision of many user of PAC such as share holder, vendor,
employee F.I., Bank, etc. depends upon financial report which is prepared
on the basis of the effective and accurate Project Accounting and Costing
periodically declared by management.

iv) Social Responsibility : It is also a social responsibility of all employees


and management of an organization to give their best efforts in providing
effective and accurate Project Accounting & Costing.

v) Future Planning : Effective and accurate Project Accounting and Costing


helps the management to make the future planning in terms of finance,
profit and investment in a project.

It is important to note that PAC whether for MIS or for statutory


requirement will not serve any purpose if following qualities are not
maintained :-

a) Timely information and recording.


b) Accuracy
c) Effectiveness

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3.0) FLOW CHART OF BASIC ACTIVITIES IN PROJECT EXECUTION

PREQUALIFICATION

COLLECTION OF TENDER DOCUMENTS

SUBMISSION OF TENDER AFTER FILLING UP SCHEDULES

SCRUTINY & EVALUATION

AWARD OF CONTRACT

RECEIPT OF LETTER OF INTENT

APPOINTMENT OF PROJECT CO-ORDINATOR & PROJECT MANAGER

EXECUTION PLAN

MOBIILIZATION STAGE CONSTRUCTION STAGE

HANDING OVER

MAINTENANCE STAGE

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4.0) Important aspect of Project and its Accounting and Costing

 Continues process till end of the project : As project is bound by


the time frame as per contract terms while PAC by both time frame
i.e. as per contract term and financial year. Project Accounting and
Costing is the continuous process from starting to till end of the
project. Even after the project is closed accounting continues till all
accounts of that project are settled completely. However, audit and
accounts are maintained for every financial year but the concerned
accounts balances are carried forward to the next financial year till all
the accounts are settled even after the completion of the project.

 Profit Center : Each project is a profit center for every organization


wherein estimation of the profit and loss is worked out and their
monitoring is controlled by PAC.

 Various Act applicable to a project : As various Acts are


applicable to every project so applicability of each act is taken care
in the PAC as adoption of the each and every formalities in relation to
applicable act is mandatory and legal requirement for a project.
Some of the Acts are given below:

1. Company Act.
2. Income Tax Act.
3. VAT Act.
4. Central Excise and Custom Act.
5. Service Rules.
6. PF Act.
7. Payment of Wages Act.
8. Bonus Act
9. Contract Labour Act.
10. BOC Act, etc.
11. Finance Act
12. Indian Contract Act.

 Team Work : PAC is not the responsibility of commercial person only


but also of each and every person who is involved in the execution of
any activity in relation to the project. PAC and project execution
are integrated and proper PAC cannot be completed without
regular support of the person involved in execution.

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 Expectation and estimation (Zero Budget) : Generally for every
project estimates are prepared out from zero point. It means each
and every activity required for the completion of the project is defined
within stipulated time and cost in detail. Estimation of one project `
cannot be used for other projects. These estimates initially
established are considered as standard for the purpose of costing.

 Understanding of each activity of the project : As project


awarded are in the nature of different category like EPC Contract,
Turnkey Project, Labour Contract, Cost Plus Contract, Item Rate
Contract etc. Accordingly applicability of the method for PAC is taken
care.

 Basis for other project : History of the project derived from PAC
System can be used for a similar project to be procured or executed.

 Study of client Approach : Sometime the attitude of the client


towards the project completion effects the profitability of the project
which matters a lot for PAC.

 Record keeping for 10 years : For each and every project, the
records of PAC are maintained from 8 to 10 years as per the
requirement of the different Act so at the time of generation of the
records, proper care need to be taken for maintaining the records in a
good conditions.

 Audit of each project by internal auditors/external auditors :


Considering every project as a profit center, each and every activity
of the project is recorded and accounted for in the PAC system. PAC is
audited by internal auditors and statutory auditors periodically. So
every activity should be accounted for and recorded with the
justification for convincing to the management and auditors.

 Contract Document : As and when project is awarded, a contract


document is signed by both the parties i.e Contractor and Contractee.
This contract document binds both the parties with the commercial
and technical terms and conditions as contractor has to complete the
work of the project according to the terms and conditions of the
contract documents.

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Before starting the execution of any activity in relation to project,
detail study of contract document is required for better controlling and
monitoring which ultimately affects PAC.

 Bill of Quantity (BOQ) :- Contract document of every project


contains BOQ. The BOQ contains the rate and quantity of each and
every activity to be executed in relation to the project and on the
basis of BOQ and work done, the contractors raise the sale bill on
the client which is recognized as revenue part.

BOQ is the basis for costing. The requirement of various input like
material, machinery and manpower for the project are prepared on
the basis of BOQ.

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5.0) Project Accounting

Considering the requirement of management, different act and other


users, every project has to maintain its books of accounts with the
help of PAC System only.

a) Principles & Assumption

Certain practices are followed in presenting the accounting


information. By general agreement, these practices have been
maintained as principles or assumptions and are, as said before,
designated as GAAP. These principles, or concepts, comprise the
following:-

 Money measurement concept


 Business entity concept
 Going concern concept
 Cost concept
 Dual aspects
 Conservatism
 Accrual
 Realization and
 Consistency

It may incidentally be mentioned that ©, (I) and (g) have been


regarded as fundamental (accounting) assumption under International
Accounting Standards.

b) Objectives of Accounting

 Maintenance of Records of Business.


 Calculation of Profit & Loss.
 Depicting (or Unveiling) the Financial Position.
 Making information available to Interested Groups.
 Providing assistance for Creation of Wealth and its maintenance.
 Other uses (or Advantages)

c) Limitations of Accounting

 Due to Inflations
 Worthless Assets
 Wanting in Accuracy
 Window Dressing
 Missing out on Non-monetary transactions
 Realizable worth is not estimable
 Personal bias in Judgment may lead to inexactness

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6.0) Project Accounting category

a) Purchase Accounting
b) Stores & Inventory Accounting
c) Account Payable
d) Cash and Bank Payments
e) Account Receivable
f) Capitalization of Fixed Assets/Loose Tools
g) Taxation Accounting
h) Cash Flow
i) Trial Balance & Final Account

6.a) Purchase Accounting : Purchase Accounting can be elaborated in


the following parts :-

 Material Requirement : At the initial stage of the project, the


material requirement is prepared for the project which become
the starting point for purchase process and accounting. The
requirement of material is prepared for a particular period which may
be monthly,quarterly or yearly.

 Issue of Indent : Indent is an official requirement for goods.


Indents are prepared by Stores/concerned department for procuring
the material. If the material is available in local area of site, then
quotation from at least three parties for such material is also collected
Important point in indent is the timely raising the indent so that
Purchase Department can get enough time to arrange the material.

The indent has to be signed by Stores-in-charge and Site-in-


charge.

 Orders : After receiving the quotations from different suppliers as per


the indent, detail negotiations of the rate is undertaken by the
Purchase Deptt. then accordingly purchase order is placed to one
party who is ready to supply the material on lowest rate with
the required quality and other favourable terms and conditions.
In the purchase order,some important terms and conditions are
taken care which are listed below :-

 Item No., Description, Quantity, Rate


 Quantity of the Material
 Taxes & Duties
 Credit period
 Material Test Certificate (MTC)
 Delivery Schedule
 Transportation Cost etc.

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On the basis of the order, proper accounting is taken place for the
receipt of material in Store. Further, no bill of the material is
processed without purchase order. The order can be for the
following purpose:-

 Purchase Order : It is issued to the material supplier for the


supply of the material.

 Work Order : It is issued to the sub-contractor for work to be


done.

 Hiring Order : It is issued to the equipments hiring party.

 Service Orders : It is issued to the different services provider.

 Capital Items Order : It is issued to the parties for supply of


capital items.

6.b) Stores & Inventory Accounting

a) Receipt of Material

Verification of Material Receipt

On reaching the material at site, Stores has to verify its quantity,


description with challan and quality. The quantity received is also
cross checked with Purchase Order's quantity. After these
verification, Stores receipt stamp is put on the challans and signed by
Store-in-charge.

Daily Receipt Register

On receipt of material, its entry is made in Daily Receipt Register.


The entry serial No. is put on challans. The entry is strictly made
right on the day of material received so that no receipt is left out
without recording. Thereafter it is recorded in Computerized Store
Package. SRV (Stores Receipt Voucher) No. is generated on this
entry.

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b) Issue of Material

Requisition for Material

Requisition for issue of material is received from respective


Engineer/Deptt./Site. This requisition is signed by Mechanical-in-
charge & Site-in-Engineer.

Requisition for issue of Sand, Stonechips not prepared on daily basis.


Actually these items are directly dumped at site location and are used
as and when required. Its consumption is calculated on the basis of
work done during the month and accordingly quantity of consumption
is provided to stores.

Booking of Consumption

On receipt of requisition, the material is issued and at the same time


its entry is made in Daily Issue Register as well as recorded in
Computerized Stores Package.

Entry for issue of Bricks, Boulder, St dust, Sand, Stonechips and steel
is made once in a month on the basis of consumption. Consumption
of Sand, Stonechips and Steel is worked out through the production of
concrete in a month.

c) Plant & Equipment at Site

Plant & Equipment receipt and issue register is maintained at every


project. Likewise material, every receipt and issue of plant &
machinery is recorded.

d) Certification of Vendor's Bills

Vendor's bills are received in Stores for checking and verification of


quantity. Stores has to cross check the quantity billed with challans
and rates of material charged. After verification, stores certify the bill
by putting the stamp on bill and it is signed by Store-in-charge &
Site-in-charge. After certification, the bill is sent to Accounts
Department of site for processing of bill and payment releasing.

e) Material Reconciliation

Reconciliation of major items like Sand, Stonechips, Cement, Steel &


Bricks is done by Stores with the help of Technical Deptt. periodically.

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f) Inventory Valuation

 Number of stock valuation method are available to value the


closing stock at a particular date such as LIFO, FIFO, WEIGHTED
AVERAGE, HIFO, Base stock method, etc. But as per Accounting
Standard, stock valuation of all the stock items is to be done on FIFO
method only. Stock valuation on closing date of every month is the
requirement of Management and Audit.

 Principle of lower of cost and market price.

g) Physical Verification

Physical verification of all the materials is taken by Stores periodically


for audit, accounting and reconciliation purpose.

h) Material Statement

Item-wise material statement containing party-wise details of material


receipt and work-wise issue is prepared by every project on monthly
basis. In order to have the information on monthly receipt and
issuance of material.

i) Loan Register

A register for recording the Furniture & Fixtures, Gas, Loose tools etc.
issued to site staff/sub-contractor on loan basis is maintained at site.

j) Profit of the organization can be increased by proper


Inventory Account as detailed given below:-

i) Timely indent.
ii) Timely assessment of material requirement.
iii) Control over scrap and wastages
iv) Timely material reconciliation
v) Proper recording of material
vi) Proper codification of material receipt and issue.
vii) Issue of Oil and Lubricant as per norms.

6.c) Account payable

Account payable is a module of PAC system which accounts for bills


received from different vendors against their supply of material and

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services rendered. Through Accounts payable module, expenses and
liabilities are accounted for in books of accounts.

Material Bill

To process a material supply bill in account payable module,


following documents are required :-

i) Original (VAT or Excise Invoice).


ii) Original Challans
iii) SRV
iv) Purchase Order Copy
v) MTC, if any
vi) Store certification
vii) Weighment Slip

Sub-contractor bill

To process a sub-contractor bill in account payable module, following


documents are required :-

i) Original bill (Service Tax or VAT Invoice).


ii) Measurement Sheets.
iii) Work order copy.
iv) Engineer certification.
v) Reconciliation.

Hiring Bill

To process a hiring bill in account payable module, following


documents are required :-

i) Original hiring bill (Service Tax/VAT Invoice).


ii) Original complete Log Book.
iii) Hiring order copy.
iv) Diesel norms reconciliation.
v) Utilization/Quantification.

Other Services Contractor's bill

To process a bill of other services providers in account payable


module, following documents are required:-

i) Original bill (Service Tax/VAT Invoice).


ii) Order copy certification

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6.d) Cash and Bank Payments

Each and every payment is recorded in detail and every month


reconciliation of cash and bank book is done. BRS (Bank
Reconciliation Statement) is prepared every month to reconcile book
balance with the bank statement balance. From the BRS, it comes to
notice that which cheque are still not cleared from banks.

6.e) Accounting of Account Receivable

On the basis of the BOQ and work done, all bill are raised on the client
for a fixed period on regular basis which is the revenue part of the
every project. The client bill is accounted for in the accounts
receivable module with the full details of activity-wise quantity, rate
and amount. All the payments and deductions made by client is
accounted for through account receivable and client outstanding
statement is prepared through this module also. Mainly two types of
sale is accounted for in account receivable is as under :-

i) Sale of work executed.


ii) Sale of Scrap.
iii) Other sales.

6.f) Capitalization of Fixed Assets

Every project requires Plant & Equipment to complete the project


within stipulated time and cost. This machinery is either hired or
purchased by organization. In case, the machinery is purchased
then it is not charged to job as it is assets for the company so it is
capitalized in the books of accounts because its utilization continuous
for a longer period. So every year depreciation or amortization of
machinery value as per the companies act is charged in the Profit &
Loss Account as a overhead. So accordingly company's fixed assets of
amortized every year. Presently Written Down Value (W.D.V.)
method is adopted for depreciation calculation.

6.g) Taxation Accounting

As earlier explained that various act is applicable on a project, the


brief notes on some of the important Acts are enumerated below:-

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 Service Tax

Nature of Levy of Service Tax

Section 66 provides that there shall be levied a tax (service tax) @


10% of the value of taxable service referred to in various clauses of
section 65 (105).

Taxable Service

As per section 66 of Finance Act, 1994, service tax is payable on


'taxable service'. Section 65 (105) of Finance Act, 1994 defines what
is 'taxable service'. The definition is different for each class of
services.

We will discuss the applicability of the Service Tax on


Project/Construction only.

Construction Service for the purpose of Service Tax

a) Construction of a new building or a civil structure or a part


thereof or

b) Repair, alternation or restoration of, or similar services in


relation to, building or civil structure which is

i) used, or to be used, primarily for; or


ii) occupied, or to be occupied, primarily with; or
iii) engaged, or to be engaged, primarily in.

commerce or industry, or work intended for commerce or


industry, but does not include road, airport, railway, transport
terminal, bridge, tunnel, long distance pipeline and dam.

Service tax can be collected by service provider from service receiver

Service tax is an indirect tax. Thorough liability is on service


provider, the tax can be collected by him from service receiver.
However, tax liability will be there even if service tax is not collected
from client/customer

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Service Tax Liability

The following options are available for arriving service tax


liability as per provisions of the service tax law :-

a) Option-I – Payment of Tax on service portion only @ 10.30%

Pay service tax at normal rate 10.30% on gross amount


charged less the value of transfer of property in goods involved
including VAT/Sales Tax under rule 2A of Service Tax (Determination
of Value) Rules, 2006. In this case CENVAT Credit of Service Tax on
input services and excise duty credit on capital goods can be availed
and there is no restriction on availment of excise duty credit on any
inputs used in execution of the said contract. Separate records are to
be maintained for materials and services.

b) Option-II – Payment of Tax on both Material portion and


Service portion @ 10.30%

Pay @ 10.30% on 100% gross bill value including material value


and avail cenvat credit on inputs, input services and capital goods
including on materials of supply portion. In this case cenvat amount
will not be considered as part of cost.

c) Option-III – Payment of Tax on 33% value of Material and


Service portion

Pay 10.30% on 33% of the bill value including value of material


by availing abatement on 67% of bill value. In this case cenvat credit
on inputs, capital goods and input services will not be available.

d) Option-IV – Payment of Tax under Works Contract


Composition Scheme @ 4.12%

Pay an amount equivalent to 4.12% of the gross amount


charged less VAT/Sales Tax paid on transfer of property in goods
involved in the execution of the works contract under Works Contract
(Composition Scheme for Payment of Service Tax) Rules, 2007. In
this case CENVAT Credit of duty on inputs used in relation to the said
works contract is not available. However the assessee is allowed to
avail of the CENVAT credit of duty on capital goods and service tax on

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various input services used in relation to the said works contract.
Once the option is exercised it cannot be withdrawn for a particular
contract.

Following observations are as under:-

i) In a composite contract, if supply portion and service portion is


identifiable and billed separately any of the above options can
be availed for payment of service tax.

ii) In case of composite contact which is inclusive of supply portion


and service portion and billing is indivisible, then the options II,
III and IV are given in above are only available.

Input Tax Credit

In a project where service tax is applicable, if service tax or


excise duty is paid for the services or input used in the project
then we can avail the benefit for such services and excise duty
paid to vendor. This is called cenvat credit and it is treated as
advance payment of tax which is not charged off to job as
cenvat credit is adjusted against output tax liability of project.

a) Input services eligible for credit

An output service provider will be entitled to credit of


service tax paid by him on input services, which are used by him
directly or indirectly in or in relation to provision of output
services. Even input services relating to setting up a office
premises will be eligible. In addition to this, services like
advertising, activities relating to business like accounting,
auditing, storage, transport etc., which are only indirectly
related to provision of output services would also be permitted
for credit. In fact, all input services relating to all activities
relating to business are eligible for Cenvat credit.

b) Credit of duty paid on input and input services and capital


goods

A provider of taxable output services has to charge service


tax in his invoice as per normal procedure. However, he gets
credit of (a) duty paid on inputs and capital goods and (b)
service tax paid on input services. This is termed as Cenvat

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Credit. This Cenvat Credit can be used for payment of service
tax on his output services.

c) Inputs goods eligible for Cenvat to service provider

Where output service tax liability is worked out @ 10.30%


on the totally turnover (including material, labour and
overhead) then we can avail the benefit of excise duty paid on
material consumed in the project execution.

d) No Cenvat credit if output service exempt from service tax

No credit is available if output service is exempt from


service tax.

 Accounting of VAT

i) What is VAT

VAT means a system on which tax is levied on the value added


to goods and services. It is collected in stages on transaction
starting from production to sales of good i.e. sales tax is
payable at each stage of the production to sales of goods.

VAT is applicable on the material part of the turnover of every


project which has to be worked out and deposited in the Govt.
account on monthly basis after taking the benefit of Input Tax
Credit. Input Tax Credit is a VAT payment made to the
registered dealers for supply of embedded material purchase
within the state. VAT liability can be worked out and paid
in the following method:-

 Detail working of the material consumption.


 Composite scheme.

VTDS @ 2% is applicable on the bill value of the contractor/sub-


contractor working with material. This is deposited in Govt.
account.

Work Contract and Deemed Sale

'Works contract' means a contract for carrying out any work


which includes assembling, construction, building, altering,
manufacturing, processing, fabricating, erection, installation,

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fitting out, improvement, repair or commissioning of any
movable or immovable property.

'Goods involved in works contract' have been included in


definition of sale' which is called deemed sale.

However, the tax is on 'goods involved in works contract' and


not on 'works contract'. Hence, unless the contract involves
transfer of property in goods', the transaction will not be
taxable.

ii) Concept of VAT and set-off/Input tax credit

The essence of VAT is in providing set-off for the tax paid earlier
and this is given effect through the concept of input tax
credit/rebate. This input tax credit in relation to any period
means setting off the amount of input tax paid by registered
dealer against the amount of his output tax. The Value Added
Tax (VAT) is based on the value addition to the goods and the
related VAT liability of the dealer is calculated by deducting
input tax credit from tax collected on sales. If for example input
worth Rs.100000.00 is purchased and sales are worth
Rs.200000.00 in a month and input tax rate of output tax rates
is 12.5%, then input tax credit/set-off calculation of VAT will be
as under:-

a) Input purchase Rs.100000.00


b) Output sold Rs.200000.00
c) Input tax paid Rs.12500.00
d) Output tax payable Rs.25000.00
e) VAT payable during the month Rs.12500.00 after set-off
input tax credit (d-c).

Input Tax Credit

VAT credit is considered to be of the nature of a refundable tax.


Therefore tax paid on purchase of embedded material as well as
capital goods on which input credit is available should not be
included in the cost of such item/capital goods.

Input Tax credit not allowed in following cases

i) If goods are purchased from unregistered dealer.

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ii) If goods are purchased from out side the state.

iii) Purchase of non-creditable goods.

iv) Purchase of goods which are to be incorporated into the


structure of a building owned or occupies by the contractor (for
infrastructure work)

v) Goods purchased from a registered dealer who has elected to


pay tax under composition scheme. A dealer who has opted for
composition scheme cannot issue tax invoice he can issue retail
invoice on which input tax credit cannot be claimed.

Restricted Tax Credit

When dealer has purchased material in the state of work after paying
VAT under local VAT Act, thereafter material is transferred to other
state, input tax credit in such cases will be reduced by 4% site
receiving the material will not get any input credit.

a) Input tax on Plant & Machinery

We are entitle for input tax credit on purchase of capital goods except
few negative listed item as per Annexure-I. Capital goods means
plant & machinery and equipment used directly or indirectly in the
execution of works contract. We are eligible for input tax credit on
plant & machinery on various installments with the condition that
plant and machinery should not moved out of State for period of 5
years or so (Presently we are not accounting input tax credit on
capital goods).

b) Embedded material where VAT is charged

Item of steel, reinforcement and structural, MS Pipe, B Wire, Nut and


Bolt where Vat is charged @ 4% in actual for separately.

In Gujarat different VAT percentage (%) is applicable so Input VAT to


be reduced separately as detail given below:-

For Steel, etc - 4%


For Sand & Stonechips, etc - 5%
For other embedded material, etc - 15%

Embedded material where VAT is charged @ 12.5% the item not

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included above to be reduced separately in account.

c) Input tax credit on tax invoice by sub-contract

In VAT, tax is collected in all stages of sale. Accordingly, sub-


contractor working with material has to submit tax invoice. He will
charge his out put tax liability for which we will be entitled to claim
input tax.
Points to be remembered while placing order on Sub-
contractor with material.

i) Sub-contractor must be registered dealer under local VAT Act.


His registration number should be mentioned in the order.

ii) We need tax invoice from them. Legally he has to raise tax
invoice irrespective of our requirement, in case he has claimed
VAT.

iii) We should avoid issuing any material on recovery basis as it


amounts to sale by us and purchase by him and we will have to
issue tax invoice to him for this transaction.

iv) While finalizing order we should insist him to declare input tax
included in the price and also output tax liability should be
freezed to avoid problem at the time of
reimbursement/finalization of account. If input/output liability is
not declared in the order/quotation he can take benefit for input
tax while claiming output tax liability and we will never come to
know the benefit availed by him.

v) Reimbursement of output tax liability should be made on


submission of documentary evidence of payment deposited.

vi) Clause should be there for deduction of VAT as may be


deducted under local Act.

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Distinction between sale of goods and works contract is as follows

Sale Work Contract


It is 'sale' It is 'deemed sale'.
Relation is seller and buyer Relationship is contractor and contractee.
In sale of goods, the thing In works contract, the things produced
produced/manufactured as a whole is as a whole is never absolute property of
absolute property of maker when it maker, even though material used in
comes into existence. He then works contract might have been his
transfers it to buyer. absolute property.
In sale, the sale is 'chattel qua chattel', The article produced as a whole directly
i.e. 'goods' are sold as 'goods', The becomes property of buyer, without fast
property in goods is transferred at the becoming property of maker. Property in
time of delivery of finished article. goods contained in works contract passes
by accretion, accession or blending
during the execution of work.
Contract is primarily for supply of Contract is primarily a contract of work
materials at prices agreed and the work and labour and materials are supplied in
or service is incidental to the execution execution of such contract.
of contract.
Rejection of goods is possible. Rejection of goods is generally difficult.
Sale is taxable under sales tax laws Transfer of property in goods involved in
works contract is 'deemed sale' and
taxable under sales tax laws.
Sale can be of standard goods as well Works contract is only tailor made i.e. for
as tailor made goods. a specific contractee.
Buyer usually never supplies any Contractee ofter supplies material to
material to seller. contractor.
Sale of Goods Act applied to the Indian Contract Act applies to
transaction transaction.
TDS provisions are not applicable TDS provisions are applicable to works
(though there is no constitutional bar in contract – both under Income Tax Act
applying TDS provision to sale of goods) and many State Vat Acts.

 TDS

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As per the Income Tax Act 1961, different sections have been
introduced by the Government through Income Tax Act regarding the
deduction of TDS (Tax Deducted at Source) from the specified
payment to specified person for specified work. We are giving below
the list of some TDS provision :-

S.No. Description TDS % Section


1 If payment is made to sub- 1.13% 194C
contractor, advertisement etc.
(inclusive Surcharge and ED Cess)
2 If payment is made to contractor, 2.27% 194C
Vehicle hiring, etc. (inclusive
Surcharge and ED Cess)
3 If payment is made to Professional 11.33% 194J
or technical. (inclusive Surcharge
and ED Cess)
4 If payment is made for the rent of
the property. (inclusive Surcharge
and ED Cess) 16.995% 194I
22.66%
i) Individual & HUF
ii) Company
5 If payment is made rent on 11.33% 194I
machinery or equipment. (inclusive
Surcharge and ED Cess)

This is the responsibility of the deductor to deduct the TDS from


the specified payment to be made to specified person for the
specified work as per the different section of the Income Tax Act
and deposit the same on the monthly basis in Government account.

 Fringe Benefit Tax (FBT): As per the Income Tax Act, every
organization has to deposit the FBT which is calculated on the value of
specific facility provided to employees which is not taxable in the
hands of the employee as a prerequisite. Fringe Benefit Tax Liability
is calculated at the rate of 30% (+SC+EC) of the taxable value of
following expenditures.
 Conveyance
 Telephone
 Travelling Expense
 Business Promotion

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 Seminars
 Contribution to superannuation conference.
 Use of hotel boarding and lodging expenses.
 Gift
 Club facility
 Scholarship
 Health Club

6.h) Cash Flow
If costing of a project is showing the profit percentage, it does
not mean same project will be generating cash in surplus. Cash flow
can be described in two parts;
i) Budgeted Cash Flow
ii) Actual Cash Flow
I) Budgeted Cash Flow :- It is prepared to know the expected surplus
or shortage of cash flow from the project for the balance work to be
executed in a particular period. Budgeted cash flow helps the
management in financial decision making.

Flow Chart of Cash Flow

Used In

Construction
Process Accrued Direct
Labour and Accrued Fixed
Used in
Material Operating
Generates Expenses
Used to Procure
Used to pay for
Work Execute Cash & Bank
Balance

Used to purchase
Via sales generates Collection Returns on
Process External Capital
Financing
Fixed Assets
Accounts
Receivable
Suppliers of
capital

II) Actual Cash Flow

This statement shows the cash surplus and shortage generated

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by a project during a particular period. From this statement, it can be
clearly observed that where the fund has been invested/blocked. Now
a days, it has become the statutory requirement of the balance sheet.
Given below is the main area where from cash-in-flow and cash out
flow is generated.

Cash-in-Flow

a) Client receipt including RA Bill, Mobilization Advance, Secured Advance.

b) Funds from HO/Zonal Office

c) Sale of Scrap

d) Project finance from Banks, etc.

Cash-out-Flow

I) Funds invested/blocked in the working capital i.e.;

a) Debtor

b) Inventory

c) Deferred expenses

d) Pre-paid expenditure

e) Advance Payment

f) Taxes

II) Investment in Fixed Assets and Loose Tool

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6.i) Trial Balance & Final Account

 Trial Balance

Trial balance is a statement, which shows the account balances


of expenses, income assets, liability on the particular date. It is the
prerequisites of the balance sheet.

Final Account consists the two parts;

 Trading & Profit & Loss Account


 Balance Sheet

 Trading & Profit & Loss Account :

The management of any business is most interested in knowing


the net income or net profit, as this will increase owners' equity. If
the business incurs a loss, owners' equity will be decreased.

The Trading A/c reveals gross profit. The excess of gross profit
and other revenue gains over sales expense including sales costs and
other expenses and any losses gives the figure of net profit. Other
expenses considered are to be the ones that are essential to the
conduct of the business. These are called INDIRECT EXPENSES and
are not shown in the Trading A/c. These revenue gains and indirect
expenses (which do not get a place in the Trading A/c) are (now)
shown in the P & L A/c.

All nominal accounts that are to be accounted for are closed by


transferring them to P & L A/c through closing entries in the nominal
accounts. These include typically on Debits and Credits sides:

A) Debits

Material Cost
Labour Cost
VAT provision

Depreciation and Maintenance

Depreciation of machinery
Repairs and Maintenance
Special Repairs [Excluded categories not to be taken]
Operational Expenses

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Financial Expenses

Interest on Capital (of categories)


Interest on Loans (of categories)
Discounts allowed
Cost of Discounting Bills
Other Bank Charges
Brokerage

Indirect Expenses

Travellers' Expenses, Salaries, Commissions (for collections)


Salesman's Expenses, Salaries & Commissions Unproductive
wages

Godown Rents
Export Expenses-Documents preparation inclusive
Packing charges
Carriage outward, Deumrrages, Dock Dues
Insurance
Agents' commissions
Vehicles Maintenance
Other Trade Expenses
Rents, Rates, Taxes
Advertisement
Office Salaries & Wages – [Managerial and assistances]
Office Establishment
Heating and Lighting
Entertainment and Hospitality
Printing and Stationery
Postage, Telegrams, Telephones, Messengers
Legal expenses
Auditing Fees
Insurance
Vehicles : Maintenance and Staff
Miscellaneous and General, Sundries
Provisions

Extra-ordinary Expenses

Loss by natural occurrences and fired (not covered by insurance)

Cashier embezzlement/defalcations.

To Net Profit transferred to Capital A/c

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B) Credits

Sale
Interest receipts
Discounts received
Commissions received
Rents received
Income from Investments
Dividends received on shares held
Interest received on Debentures

Provision for discount on creditors


Interest on renewal of bills
Interest from other sources
Differences in expenses (of previous years) – receipts
Training and other fees received
Miscellaneous receipts

By Net Loss transferred to Capital A/c

Final Account consists the two parts;

 Assets
 Liability

 Balance Sheet

Balance sheet shows the detail of assets owned by the company and
liability existing on the particular date for a particular period. The
balance sheet is audited and signed by auditors and directors jointly
and same is published in the newspaper as per the SEBI rules. From
the balance sheet, financial position of the company can be
ascertained and same is also used by number of users, share holders,
vendors, financial institutions, banks, investors etc.

 Assets

Fixed Assets

 Land, Buildings, Freehold Premises, Plants, Machinery,


Tools, Furniture, Livestock, Railway Siddings, etc.

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Less

 Depreciation : (if in respect of each of the above, to be


given for each; or accumulated basis).

 Goodwill, Patents, Technical Services and Consultations


rendered.

Investments (at cost)

[To be listed]

Current Assets

 Interests Receivable

 Inventory (or Stores)/(Closing) Stock/Stock-in-Trade (or)


Work-in-progress/Finished/Goods, etc.

 Sundry/Trade Debtors and Account/Bills Receivable

 Cash in hand and in Bank Balance

 Marketable Securities

 Pre-paid (or Unexpired) Expenses, Pre-payments, Loans,


Advance, Deposits, etc (given out) – including Tax Pre-
payments and Tax-deducted at source.

Less

Current Liabilities and Provisions and Bill Payable (if not given
under Liabilities)

Other Assets

Other Long-Term investments


Unexpired Insurance
Accrued Income

Unamortized discounts on debentures


Equity Shares in, and Loans to Subsidiary Companies
Rights owned, e.g. Mining, etc.
Subsidizes received.

(Others)

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 LIABILITIES (and CAPITAL or OWNERS' EQUITY)

Share Capital

 Equity
 Preference (with further details as appropriate)

 Reserves and Surpluses (Retained Earnings)

Contingent Liabilities

[To be listed)

Others

 Long-term Loans/Debt – Secured, Unsecured, and Deposits


(received) Debentures and Premiums thereon.

 Mortgages
 Deferred Payment Credits
 Bad Debts and Doubtful A/c

Current Liabilities and Provisions

Accrued Expenses
Accrued Interest
Accumulated Depreciation, (if not shown under Assets)
Bills Payable (Notes and Accounts)
Sundry Creditors/Trade Creditors
For goods/purchases
For expenses

For outstanding wages/salaries


Customers' advances
Unclaimed Dividends

Provision for Dividend

Provision for Taxation and Accrued Taxes,Income Tax, Social Security Tax,
etc.

Provision for Gratuity

Provisions under dispute (on arrears) : Municipal Taxes, Electricity Tariff,


etc.

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Bank Overdraft

(Others)

[It is for information that : Wages A/c, or Salaries A/c, is a nominal


account and should accordingly be charged to the Profit and Loss
Account,while outstanding Wages (or Salaries) Account is a personal
account– to the person to whom the Wages (or Salaries) have to be
paid – and hence is shown in the BS on the Liabilities side.]

Characteristics of Trial Balance and Balance Sheet

Sl. Detail Trial Balance Balance Sheet


No.
1 Objective To test accuracy of ledger To know the financial
postings (more of a position of the
satisfaction than rigour) business.
2 Periodicity Preferably prepared every At the end of the
month; and, if need, be accounting period.
sooner.
3 Titles on the Debits and Credits Liabilities and Assets.
two sides (L &
R)
4 Inferring P/L Does not explicity show Shows Profits and
Profit or Losses. Losses of business.
5 Closing Stock No information Contains information.
6 Legal utility Not acceptable in Courts; Legally acceptable and
serves only as an internal is a basis for paying
document. taxes.
7 Need Not compulsory. Legally compulsory.
8 Types of All types of accounts are Only Real and
Accounts included. Personal accounts are
included.
9 Content Cash Book Balances. Cash Book Balances.
10 Source Prepared from Ledger. Prepared from Ledger.
11 What is it? Not an account; but is a Not an account, but is
statement a statement.
12 What is Such accounts whose two Such accounts whose
missed? sides are in balance. two sides are in
balance.

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7.0) Codification of Accounting

The codification is most important part of the accounting


because through proper codification only each and every expenses,
income, assets, liability can be accounted for. Codification plays a
vital role in preparation of MIS, Trial Balance, Profit & Loss A/c and
Balance Sheet. The codification of accounting are generally provided
in the following category:-

 Asset Part

 Fixed Assets
 Current Assets
 Deferred Revenue Expenditure etc

 Liability Part :

 Share Capital
 Reserve & Surplus
 Short term loan
 Long term loan
 Current liabilities etc.

 Project Expenses :

 Material consumed.
 Labour Payment.
 Hiring Payment.
 Transportation Payment
 Consultation Payment etc.

 Project Overhead :

 Salary & Wages.


 Rent
 Conveyance
 Transportation expenses
 Bank Guarantee
 Insurance
 Interest
 Motor Vehicle expense
 Accommodation expense etc.

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8.0) Explanation of Important Terms

(i) Mobilization Advance

This account represents the details of Advance received from client


against the mobilization of newly project. This may be a Intt.Bearing
Advance/Intt. Free. Mostly client takes Bank Guarantee for the
amount equivalent to the Mob. Adv. Amount.

Recovery of Advance

The Recovery of Advance is made from the payment of R.A. Bill


as per the terms and conditions of Contract.

(ii) Secured Advance

This account represents the details of advance received from client


against material procured and physically lying at site location.

Recovery of Advance

Recovery of this advance is made from the payment of R.A. Bill as per
the percentage of material used in billing period.

(iii) Retention

This account represents the amount deducted by client from our RA


Bill Payment. The deduction is made on a percentage mentioned in
the Contract Agreement.

Release of Retention Money

The retention is released by client after completion of defect liability


period, as per the terms and conditions settled.

Note :-

Like-wise client, company also give to its Sub-contractors Mobilization


Advance, Secured Advance and deduct Retention from their R.A. Bill
payment as per terms and conditions settled.

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(iv) Remittance

These accounts represent the Cash & Bank Balance of all the sites.
The amount remitted to site by Office or by any other site is debited
to this account and value of expenses incurred by site is credited
through site Bank & Petty Cash Journal Voucher. At the end of every
month, the balance in Remittance Account of each site should match
with Bank & Petty Cash Balance at site.

(v) Embedded & Non-Embedded Material

Embedded material is used in execution of project which ownership


is transferred to client.

Embedded Material

 Cement
 Steel
 Sand
 Stonechips
 Bricks
 Binding Wire
 M.S. Plate
 Etc.

Note :-
If the above-referred material is used for construction of Temporary
Infrastructures like “Site Office”, “Site Stores” etc. then these
material will not be called as Embedded.

Non-Embedded Material
Materials which are not directly consumed for execution of client work
or physically not transferred to client are called non-embedded
material. A few name of such non-embedded is given below:-
 Spare Parts of Plant & Equipment
 Safety Items
 Shuttering Material
 Planks
 Balli
 Oil & Lubricant, etc.

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(vi) Letter of Credit

Letter of Credit is a mode of payment to vendor by a client through


banks only. Bank of the client release the payment to the bank of the
vendor after fulfillment of certain terms and conditions of the
contract.

(viii) Extra Items

While all activities of any project are executed as per BOQ, sometimes
as per client requirement some activities are executed which are not
covered in the BOQ. These are considered as extra items and the
same are to be claimed with client in addition to BOQ items. Extra
care should be taken while executing any extra item i.e. the rate and
the quantities should be approved by the client in writing so that
payment is not withheld after execution of extra items.

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9.0) Management Information System (MIS)

From controlling, monitoring and costing point of view, every project


need to prepare various reports periodically for the management and
other users. Accuracy, effectiveness of the MIS depends upon the
quality of the PAC of project. Day to day working/decisions are
controlled by the management on the basis of various MIS relating to
PAC. Some of the important MIS are listed below :-

9.1) Material Reconciliation

Material reconciliation statement is prepared periodically to working


out the quantity of shortage/excess of the construction material use in
bonafied and non-bonafied consumption for execution of the project.
Timely providing this MIS helps the project management to take the
decisions in case abnormal results are observed in the matter
reconciliation.

9.2) Quantity Reconciliation

Quantity reconciliation is prepared to know the difference between


quantity executed and billed with the client. The concern person of
the project management team has to keep the detailed track of item-
wise difference in the quantity executed and billed with the client as
on date.

9.3) Overhead Report

Overhead report is prepared monthly and cumulative to know the


amount spent head-wise,of the project.

9.4) Progress Report

On daily/weekly/monthly basis, a progress report of project in term of


quantity and value of each activity executed is prepared and send to
management.

9.5) Machine Utilization Report

Machine utilization report present the history of each machine


utilization in terms of nature of work executed by machine. This
report is utilized by the management from the costing point of view.

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9.6) Diesel Norms Checking

Every project has to prepare the report of the diesel consumed as per
norms and actual.

9.7) Client Outstandings

This statement is prepared periodically by the project team for


showing the amount receivable from the client on a particular date.

9.8) Site Liability

Site liability report shows the amount payable to various creditors at a


particular date for a particular period.

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10.0) Project Costing
Costing is a main tool for the management which is used to know
the following :-
 Profit & Loss figure of each and every activity executed as per
the client bill.
 Cost comparison of each and every activity as per tender and
actual.
On the basis of the costing figures, management can take decisions or
actions required for any improvement in the execution of any activity
of the project. Future profitability is worked out on the basis of costing
and long-term finance planning is undertaken by the management
for the project. Some important terms and activity of the costing has
been defined below:-
10.1) Cost Code
Cost Code is used for a group of similar activities executed at site in
relation to BOQ items of the sale bill. All expenses of project are
debited in respective cost code in addition to accounting allocation
code. On the basis of these cost codes, costing report is prepared.
Cost codes have been broadly divided in two parts:-

i) Billable - (Directly related to BOQ Item)


ii) Non-billable - (Infra-Overhead, etc.)

10.2) Costing for a particular period

Costing for a particular period present the activity-wise profit and loss
amount earned by an organization in relation to the work executed as
per the sale bill/BOQ. Given below is the important information
which is the basic requirement of the costing.

i) Sale bill.
ii) Unbilled bill
iii) Uncertified sale
iv) Material reconciliation
v) Quantity reconciliation
vi) Closing of books of accounts
vii) Utilization of Machinery – quantity and output
viii) Mobilization and Demobilization expenses.
ix) Deferred expenses.
x) Shuttering expenses.
xi) Overhead expected cost incurred work done
xii) Work estimate/tender estimate.

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10.3) Cost to complete for balance job

Cost to complete for the balance job shows the activity-wise expected
profit and loss amount to be earned by the management from the
balance work of the project to the executed in a particular period.

11) Consequences

It is important to note that PAC whether for MIS or for statutory


requirement will not serve any purpose the following qualities are not
maintained:-

a) Timely information and recording.


b) Accuracy
c) Effectiveness

Given below are the major consequences in case the above qualities
are not maintained in the PAC:-

i) Poor Planning.

ii) In-complete MIS.

iii) Delay in decision making.

iv) Weak in arbitration cases.

v) Problem in legal cases.

vi) Panel provisions and interest as per different Act.

vii) Not updated with the market.

viii) Not helpful in future tendering.

ix) Poor in cost control.

x) Short claim from client.

xi) No scope for development.

xii) Profit reduction.

xiii) Problem in ascertaining the actual status of project.

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12) Role of Engineers in PAC

Purchase Accounting

a) Timely indent.
b) Correct material description
c) Proper material planning for next 3 months.

Inventory Accounting

a) Quality check.
b) Proper fill-up requisition slip

 Free or chargeable
 Name of party
 Extra item
 Infra work
 Cost Code
 Consumable or returnable

c) Shuttering and staging material control over wastage


after issue from Store Department.

Material reconciliation

a) Timely information.
b) Concrete reconciliation since starting.
c) Proper record of batching plant production report.
d) Major construction material.

 Notice of items issued for extra item work.


 Diesel issue for machinery as per norms.
 Control over scrape and wastage of steel and other construction
material.
 Declaration of surplus items.
 Notice on consumption of the material more than consumption
norms.

Sub-contractor's billing

a) Master information of the sub-contractor.


b) Proper orders.
c) Proper measurement sheets.
d) Rate approval from office with the cost break-up.

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e) Minimize labour supply.
f) Reconciliation with the sale bill.
g) JMR
h) Separate bill for infra work.
i) Quantification of non-billable items.
j) maximum payment in items rate.
k) Timely bill preparation.
l) Average labour payment.
m) Correct labour strength.
n) In case of sub-contractor working on back to back basis,recon-
ciliation with the sale bill should be attached with sub-contractor
bill.
o) Labour slips clear narration should be mentioned.
p) Correct Cost Code should be defined at sub-contractor and
labour supply bill.
q) In case of contractor left from the site, the quantity executed by
him should be reported to management by site.

Equipment hiring bill

Requisition

a) Complete information such as hiring period, taxation clause, etc.

b) Timely information to R.O. - Mostly requisition is send after


engaging equipment on hire.

c) Rate negotiation keeping service tax/VAT clause in mind.

d) Mob and Demob clause-clear amount.

e) Extra hour payment clause.

Work Order

a) Service tax invoice/VAT invoice, clause

b) Work order to be prepared in the line of R.O. approval.

c) It should be enclosure of Bill – first time.

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Bills

a) No Diesel amount to be added in bill for free issue.

b) Service Tax/VAT invoice – To avail the benefit.

c) Checking from Accounting point of view - Logbook checking,


diesel norms, etc.

d) 24 hours working per day – Special comments is required on


bill.

e) Close monitoring on utilization of hire equipment by sub-


contractor for Debit Note.

Client Sale Bill and Contractor's agreement

a) Timely submission of sale bill to the client.

b) knowledge of;

i) Extra item, if any.

ii) Unbilled, if any.

iii) Claims, if any.

iv) Client dispute regarding sale bill item, if any.

c) Timely correspondence with the client.

d) Status of job value, Mobilization Advance, Secured Advance or


any future recovery.

e) Study of the contract clause and ready with the commercial


terms and conditions.

f) Quantity reconciliation with the client paid to the sub-


contractors.

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Service Tax and VAT

Work Order : Whenever a order is issued to sub-contractors,


equipment hiring agency, professional agency or any other party, it is
to be noted we should discuss the rate with the party with a conditions
that rate are inclusive of all taxes and duties but with a mandatory
clause in purchase order that party has to submit the service tax
invoice showing specific percentage and amount of service tax in the
bill so that we can avail benefit of cenvat of service tax being paid on
input services.

TDS : While issuing the order to any party if TDS is applicable should
be informed to the party about percentage of the TDS is to be
deducted because it effects the cash flow of the party.

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