Accounting Observation: Invoicing
Aug 5/22
by Michael Copas
Once every month, on every project, two mutually-exclusive processes face off. Contractors submit a request for payment (Invoice) for services rendered, and designers are charged with assessing if that request is appropriate.
Related blog:
Understanding Accounting vs. Contract Admin
Once every month, on every project, two mutually-exclusive processes face off. Contractor’s submit a request for payment (Invoice) for services rendered, and designers are charged with assessing if that request is appropriate.
For the past one hundred years or so, this process was managed with delicacy and negotiations. The introduction of powerful accounting software has changed the pace and attitude of this engagement. The contract is clear that the value work for which payment is requested are subject to review by observations of completed work and certified to be within the value being requested, usually a design professional. Contractors now simply issue an Invoice and demand swift validation.
Two inherent problems:
A monthly invoice being issued directly to the Owner of the project goes beyond an Application for Payment, called for in CCDC documents and by-passes validation by site observation the value of the work completed also called for under contract.
A list of accounts and transactions measure progress differently than can be observed. In accounting the methodology is called the Accrual system, which states that “Total payments last period + the payment in this period = Total payments to date”. From an observation point of view, the progress of the last period has been recorded, but there is no way to observe the work done during this period, so the accrual system does not work for observation. However the process mentioned earlier that has been in place for over a hundred years, does work. It has no name, but the formula is “Total payments to date—Total payments last period = Total payments this period”.
It is clear that both systems present the same data but the matrix on the right can be validated by site observation, while the one on the left is simply adding $ values.
One other abuse of accounting systems is the breakdown is based on trade contracts and changes are distributed to each trade. As long as each change is trade specific the problem is limited to one issue. Once a change is added to a trade contract the trade breakdown is revised and no observation of either progress of the change or progress of the contract can be recorded.
Common problem in CCDC 5A and 5B, 14 and 15 in which the Contractor who is managing the Construction project on behalf of the Owner. This provides the Contractor with authority to develop the breakdown and define the ways and means to introduce change. What often happens is the changes are added to a trade line item in the breakdown which makes it impossible to confirm change progress by observation independent of the breakdown.
Another good read from the other side is Andrew Civitello, Jr.’s 1987 classic CONTRACTOR’S GUIDE TO CHANGE ORDERS – The Art of Finding, Pricing, and Getting Paid for Contract Changes and the Damage They Cause
Michael Copas is a co-founder of Statslog Software Corporation, which has been providing continuing service to contract administrators in the offices of design professionals since 1984.