1. What is a construction contract?
Construction contract: A written contract for the construction of an asset or a group of assets that are closely related or interdependent in terms of their design, technology, function, or basic uses.
Fixed-price construction contract: This is a construction contract in which the contractor agrees to a fixed price for the entire contract or a fixed unit price per completed product. In some cases, when prices increase, that price may change depending on the terms of the contract.
Construction contract with additional costs: This is a construction contract in which the contractor is reimbursed for the actual costs that are allowed to be paid, plus an additional amount calculated as a percentage (%) of these costs or a fixed fee.
Construction contracts can be agreed upon to build a single asset, such as a bridge, a building, an oil pipeline, or a road, or to build a complex of assets that are closely related or interdependent in terms of design, technology, function, or basic purpose, such as an oil refinery or a textile and garment factory complex.
The construction contract also includes:
(a) Service contracts directly related to the construction of the property, such as: Consulting, design, and survey contracts; Project management and architectural service contracts;
(b) Contracts for the restoration or demolition of assets and the restoration of the environment after the destruction of assets.
2. Principles for recognizing and determining revenue from construction contracts according to accounting regulations.
2.1. Recording revenue from construction contracts according to Circular 200/2014/TT-BTC on the accounting regime for enterprises.
Principles for recognizing and determining revenue from construction contracts.
a) Revenue from construction contracts includes:
– Initial revenue is stated in the contract;
– Increases and decreases resulting from contract execution, bonuses, and other payments if these are likely to change revenue and can be reliably determined:
+ Contract revenue may increase or decrease over time. For example, the contractor and client may agree on changes and requirements that increase or decrease contract revenue in the next period compared to the initially approved contract; revenue agreed upon in a fixed-price contract may increase due to rising prices; contract revenue may decrease due to the contractor's failure to meet deadlines or ensure the quality of construction as agreed in the contract; when a fixed-price contract specifies a fixed price per unit of completed product, contract revenue will increase or decrease as the volume of products increases or decreases.
Bonuses are additional payments made to contractors if they meet or exceed the required standards for contract performance. Bonuses are included in the revenue of a construction contract when two conditions are met: (i) It is certain that specific standards stipulated in the contract will be met or exceeded; (ii) The bonus amount can be reliably determined.
– Other payments received by the contractor from the client or another party to compensate for costs not included in the contract price. For example: Delays caused by the client; Errors in technical specifications or design; and disputes regarding changes in contract performance. Determining additional revenue from such payments depends on many uncertain factors and often depends on the outcome of numerous negotiations. Therefore, other payments are only included in the revenue of a construction contract when:
+ Agreements have been reached resulting in the customer agreeing to compensation;
+ Other payments that have been approved by the customer and can be reliably identified.
b) Recognize revenue from the construction contract in one of the following two cases:
– In cases where the construction contract stipulates that the contractor is paid according to the planned progress, when the results of the construction contract can be reliably estimated, the revenue of the construction contract is recognized corresponding to the portion of work completed as determined by the contractor on the date of the financial statement, regardless of whether or not a payment invoice according to the planned progress has been issued and the amount stated on the invoice;
– In cases where the construction contract stipulates that the contractor is paid based on the value of the work performed, when the results of the construction contract are reliably determined and confirmed by the client, the revenue and expenses related to the contract are recognized corresponding to the portion of work completed and confirmed by the client in the period reflected on the issued invoice.
c) When the outcome of a construction contract cannot be reliably estimated, then:
– Revenue should only be recognized up to the extent of the contract costs incurred that are relatively certain to be reimbursed;
– Contract costs are only recognized as expenses in the period in which they have been incurred.
2.2. Recording revenue from construction contracts according to Circular 133/2016/TT-BTC on the Accounting Regime for Small and Medium-Sized Enterprises
Principles for recognizing and determining revenue from construction contracts:
a) Revenue from construction contracts includes:
– Initial revenue is stated in the contract;
– Increases and decreases resulting from contract execution, bonuses, and other payments if these are likely to change revenue and can be reliably determined:
+ Contract revenue may increase or decrease over time. For example, the contractor and client may agree on changes and requirements that increase or decrease contract revenue in the next period compared to the initially approved contract; revenue agreed upon in a fixed-price contract may increase due to rising prices; contract revenue may decrease due to the contractor's failure to meet deadlines or ensure the quality of construction as agreed in the contract; when a fixed-price contract specifies a fixed price per unit of completed product, contract revenue will increase or decrease as the volume of products increases or decreases.
Bonuses are additional payments made to contractors if they meet or exceed the required standards for contract performance. Bonuses are included in the revenue of a construction contract when two conditions are met: (i) It is certain that specific standards stipulated in the contract will be met or exceeded; (ii) The bonus amount can be reliably determined.
– Other payments received by the contractor from the client or another party to compensate for costs not included in the contract price. For example: Delays caused by the client; Errors in technical specifications or design; and disputes regarding changes in contract performance. Determining additional revenue from such payments depends on many uncertain factors and often depends on the outcome of numerous negotiations. Therefore, other payments are only included in the revenue of a construction contract when:
+ Agreements have been reached resulting in the customer agreeing to compensation;
+ Other payments that have been approved by the customer and can be reliably identified.
b) Record the revenue from the construction contract as follows:
When the outcome of a construction contract is reliably determined and confirmed by the client, revenue and expenses related to the contract are recognized corresponding to the portion of work completed and confirmed by the client during the period, as reflected in the issued invoice.
c) When the outcome of a construction contract cannot be reliably estimated, then:
– Revenue should only be recognized up to the extent of the contract costs incurred that are relatively certain to be reimbursed;
– Contract costs are only recognized as expenses in the period in which they have been incurred.
3. Principles for recognizing and determining revenue from construction contracts according to tax regulations.
– The taxable value for construction and installation is the value of the project, project item, or completed work delivered, excluding VAT.
+ In cases where construction and installation include the supply of materials, the construction and installation price includes the value of the materials excluding VAT.
+ In cases where construction and installation services do not include the supply of materials, machinery, and equipment, the taxable value is the construction and installation value excluding the value of materials, machinery, and equipment before VAT.
+ In the case of construction and installation, payment is made based on project items or the value of completed construction and installation work, excluding VAT.
– For construction and installation, including shipbuilding, the time of acceptance and handover of the project, project item, or completed construction and installation volume is the time of acceptance and handover, regardless of whether payment has been received or not.
The invoice date for construction and installation is the date of acceptance and handover of the completed project, project item, or completed construction and installation volume, regardless of whether payment has been received or not.
In cases of multiple deliveries or handover of individual items or service stages, an invoice must be issued for the quantity and value of goods or services delivered or handed over each time.