How to deduct an advance on a construction contract

The client has paid an advance on a construction contract. Now every invoice has to return part of it, and the last one has to close it completely. Construction Team, software for managing construction projects, works out how much to deduct and does not let an invoice through that breaks the rule.

What it means to deduct an advance

An advance is an amount the client pays up front. The invoice for it has already been issued and its VAT has already been declared. So every later invoice on the same contract subtracts that amount from its base, which is the amount before VAT. If that does not happen, VAT is paid twice on the same advance.

An example from start to finish

The contract is for 50,000 € excluding VAT, with a 20% advance. The client pays 10,000 €. Then three invoices from acts follow.

The first act is for 20,000 €. Construction Team suggests deducting 4,000 €, the same 20%, and the invoice comes out at 16,000 € excluding VAT. The second act goes the same way: 20,000 €, deduction 4,000 €, invoice 16,000 €. That leaves 2,000 € of the advance.

The third invoice is the final one, for an act of 10,000 €. It deducts everything that is left, 2,000 €, and comes out at 8,000 €. The advance is closed: 4,000 + 4,000 + 2,000 = 10,000 €.

The amount is suggested for you

When you issue an invoice from an act, the deduction field is already filled in. It holds the contract percentage applied to the value of the act, but no more than the advance still available and no more than the base of the invoice. If your case is unusual, you change the amount right there.

Which invoices are refused

An invoice on a contract with an advance either deducts from it or carries a reason for not doing so. The reason is at least 10 characters and is saved in the audit log. The final invoice has no such option: it clears all of the remaining advance.

Also refused are a deduction larger than what is left, and a credit note against an advance invoice for more than its undeducted part.

You cannot send a supplier's invoice back, so Construction Team records it as it is. If no advance is deducted in it, the program warns you.

Where you see how much of the advance is left

On the contract card, under "Financial Terms" and "Advance Payment", you will find "Received", "Utilized" and "Remaining to utilize". If you are the client, the second row is "Deducted". Below them is the row "Advance to deduct (excl. VAT)". The figure is calculated from the advance invoices that have been issued, even if the client has not paid them yet. In the example above, after the second invoice, it is 2,000 €.

On the invoice itself, the same figure is in the "Contract advance" block and is called "Advance to deduct".

What to do when the invoice is smaller than the advance

Say the final invoice is only for 3,000 €, while 5,200 € is left to deduct. It cannot close the advance, so it is not issued. The block shows how large the advance is and how large the base is, and says that a final invoice cannot clear it.

There are two ways out. One is a credit note against the advance invoice for the difference. The other is to recognize a legacy deduction on an older invoice, if part of the advance was already deducted there and Construction Team does not see it.

An advance to a subcontractor

The balance is kept in the direction of the contract. An advance to a subcontractor is often a fixed amount rather than a percentage. Then the deduction follows the share of the contract value that the act covers. A delivery of 15,000 € on a 75,000 € contract is 20% of it, so 20% of the advance is deducted. With a 10,000 € advance, that is 2,000 €. A larger delivery carries a larger deduction and a smaller one carries a smaller deduction, always against the same base.

What happens to old invoices

An old invoice in which the deduction is built into the line items does not fix itself. You recognize the deduction with an action on the invoice. A credit note against the advance invoice releases it. What is returned with a credit note or by cancelling the invoice goes back into the balance. The deduction shows as a line on the invoice, in the PDF before VAT, and on the contract card.

Related Articles

• Construction Progress Certificates Software - the certificates the advance is deducted from
• Cost Price in Construction - the advance in the project cash flow
• FIDIC Contracts in Construction - advance and retention under international conditions