Subcontract Management

When a general contractor or home builder agrees to pay a separate company to complete a certain portion of the construction project, the separate company is referred to as a "Subcontractor." The agreement between the general contractor and the subcontractor usually involves a description of the work to be done, a timeframe in which the work should be performed, a dollar amount the subcontractor will be paid for the work, and the percentage which the general contractor can retain until the contract is completed.

The accounting system provides advanced tools for tracking subcontracts. Information about subcontractors, including 1099 status, co-payee status, and worker’s compensation insurance expiration dates are maintained in the Vendor File. Special data entry programs and reports are available for accurately recording and reviewing subcontract information.

Subcontractor Entry in the Vendor File

Subcontractors are entered into the system in the same manner as regular vendors. New subcontractors are usually entered through the Vendor Entry program on the Accounts Payable main menu. When subcontractors are entered through the Vendor Entry screen, there are certain entry fields which should receive special attention.

Subcontractor (radio button)

If the Subcontractor radio button is checked, the vendor is a subcontractor. This field is mainly informative. A subcontractor may have vendor invoices assigned and a vendor may have vouchers entered.

Copayee Required (check box)

There may be times when the company will be required to issue a check to both the subcontractor and his supplier. In these cases, the accounting system can print a check with two company names listed in the "TO" field. In order to prepare for this eventuality, check this box. This will alert the system to ask for the name of the co-payee during payment selection

Print 1099 (check box)

This determines whether the vendor should be sent a 1099 form. For tax purposes, independent contractors must report all their income from outside sources. The company is required to generate a 1099 form indicating the amount of money paid to this contractor during the past year. If the subcontractor is an independent contractor, check this box.

Doing Business As (DBA)

Many subcontractors are independent contractors, or self-employed individuals who do not work for an established company. Some of these individuals will represent themselves under a company name, even though the company has not been incorporated. In these cases, the accounting system has the ability to refer to the subcontractor using the company alias, and still print checks and 1099 forms addressed to the individual Doing Business As the company name.

DBA vendor (check box)

If the vendor is "Doing Business as" a company name, check this box. Otherwise, leave the box unchecked.

Worker’s Compensation

Keeping track of which subcontractors have a current worker’s compensation insurance policy is a must. If an uninsured subcontractor is hurt on the job site, the worker’s compensation claim will go against the company's insurance. The accounting system has features which help track this important aspect of subcontract management.

Insurance Certificate on File (check box)

Check this box if the subcontractor has a Worker's Comp. Insurance Certificate on File. If there is no certificate on file, the general contractor will be required to pay the Worker's Comp. insurance at the subcontractor’s rate. He may elect to backcharge the paid amount to the subcontractor when the subcontractor invoices the general contractor for work done.

Expiration Date

The expiration date is important because after the certificate expires, the general contractor will be required to pay the Worker’s Comp. premium. Enter the date the subcontractor’s insurance certificate expires or press the lookup button and a Calendar will come into view. Choose the correct date and click the OK button.

Surcharge

If the subcontractor’s certificate has expired, this percentage will be used to calculate the amount to be backcharged to the subcontractor. This is the amount to surcharge the subcontractor should an invoice be submitted before submitting proof of an up to date insurance policy.

Subcontract Retention

When a general contractor receives a billing from a subcontractor, it is customary for the general contractor to withhold a portion of the payment (usually 10 percent of the billing amount) as "Retention." This withheld portion helps to assure that payments made to the subcontractor will be enough to cover their hard costs, but not quite enough to give them a profit while their portion of the job is still in progress. This gives the general contractor some measure of control when working with subcontractors. For example: the general contractor may delay payment of any retention amounts until the subcontractor’s work has been finished and inspected for quality and adherence to the provisions of the subcontract.

Default Retention Rate

Withholding of retention amounts is taken care of during subcontract invoice entry; however, entering a default retention rate here will cause the system to automatically calculate and insert a retention amount on all invoices received from this subcontractor.

Setting Up Subcontracts

When a job is being set up in the accounting system, budgets are entered for all anticipated costs through the Job Setup menu option in Job Costing. This menu option is described in detail in Job Setup.

This screen is also where subcontract information is initially entered into the system. The screen will appear as follows:

Enter the Cost Code number and Type "S" for Subcontract.

Next, enter the quantity, amount and unit name. Most subcontracts are not tracked by unit, only by percentage of completion billings. At this point, the accounting system asks for an Original Estimate. Enter the dollar amount originally anticipated to be spent on this subcontract. Now the system asks for a Current Estimate. If the estimated dollar amount for this subcontract has changed since the original estimate was submitted, enter the new figure here. Usually, this entry will be the same as that in the Original field. If this is the case, just press <Enter> and the system will duplicate the entry from the previous field.

The subcontract has now been set up properly.

Working With Change Orders

Frequently the makeup of a subcontract will change as the job progresses. Sometimes these changes are initiated by the owner who wishes to make additions to the original plan. Sometimes changes are submitted by the subcontractor who wishes to receive more money for unforeseen complications in completing his subcontract. Each time a subcontract price changes, the general contractor determines whether this subcontract change will also change the contract price for the entire job.

The accounting system provides an excellent system for entering and tracking change orders. These entries are made through the Change Order tab in the Job Setup screen.

Processing Subcontract Billings

Once the subcontract has been properly set up, the accounting system is ready to accept billings received from the subcontractor. Depending on the duration of the subcontract, the subcontractor may bill just once or repeatedly. For long duration contracts, subcontractors usually bill a percentage of the total subcontract price, based on their progress on the job. For this reason, subcontract billings are also referred to as Progress Billings.

Entering subcontract invoices is done through Invoices on the Accounts Payable menu.

The entry screen below is used for entering subcontract invoices.

When this screen is initially displayed, the operator is required to enter the job number and cost code for the subcontract being billed. The system will then display all the contract and prior billing information as shown above.

Enter either a dollar amount or a percentage of the contract being billed. If this is not the first billing received on this subcontract, an amount and a percentage will appear in the Prior Billings row. If this is the case, the operator may either enter a Billed To Date figure (from which the system will subtract prior billings to arrive at a This Invoice figure), or a This Invoice figure (to which the system will add the Prior Billings to come up with a Billed To Date figure).

Retention

After the invoice amount has been entered, the operator may specify a retention percentage. If the default retention field has been set in the vendor record, this field will be filled automatically. The dollar amount shown here will be deducted from the invoice and held in a special general ledger account until the subcontract is completed or retained amounts are released for payments .

Backcharges

Indicate whether any additional amounts are to be deducted from the invoice using a backcharge.

Discounts

In some rare cases, subcontractors will offer a discount for prompt payment. Enter the discount amount and terms here.

The invoice is now ready to be proof listed, edited, backed up and posted.

Subcontract Reporting

Once one or more invoices have been posted to a subcontract cost code, subcontract information may viewed and printed at any time.

Subcontract Report

This report contains detailed information about contracts, change orders, billings, retention, backcharges, and payment status. The Subcontract Report is listed by job. The report heading includes the report title, date and time, company name and the job name and number. For each subcontract, the system first lists the cost code number and description and certain subcontractor information including name, address, phone number, worker’s compensation expiration date, and federal ID number.

Subcontract Status Review

This on-screen review contains summary information such as billing, retention, and backcharge totals.

Processing Subcontract Payments

Payment processing for subcontract invoices follows the same steps as regular trade invoice payment. Mark invoices for payment using Payment Selection on the Accounts Payable menu, then print checks using the Print Checks option. During the check run, some special features of subcontract management become evident.

Subcontract Checks

Checks written to subcontractors will usually contain a subcontract summary on the check stub. This shows the subcontractor the record of how much has been billed, retained, backcharged, and paid so far on this contract. If a subcontractor is being paid for more than one job, the accounting system will print separate checks for each job on which the subcontractor is working.

If the company desires to have just one check printed for the subcontractor in this situation, a check box is available during check printing which allows the user to exclude the subcontract summary portion of the check stub and make it possible to lump multiple subcontract codes onto one check.

Dual-Payee Checks

If the "Co-Payee" field has been marked in this subcontractor’s vendor record, the system will allow the operator to enter the name of the co-payee,during payment selection. If there is to be a second payee on this check, enter the Vendor ID number of the co-payee.

Paying Retention

When the subcontractor has finished his portion of the project (or at any point during the duration of his subcontract), the general contractor may choose to release retained amounts for payment. There is a special procedure provided to release this retention for payment. This procedure must be followed closely to ensure the accuracy of the data concerning this subcontract.

Entering Retention Payment Invoices

The first step in paying off retained amounts is to create a retention payment invoice. This entry is usually not initiated by a billing received from the subcontractor. Most subcontractors will not send a special billing for retention. Retention payment invoice entry is accomplished through the Invoices option on the Accounts Payable menu.

When the invoice is entered, the system will display the amount of money retained to-date on this subcontract code. The operator may choose to release some or all of this amount for payment. Once the amount of retention to be paid has been selected, select the Reconciliation tab. All of the individual subcontract invoices associated with this subcontract are displayed with their retention amounts. The operator must reconcile the full amount of retention to be paid with the individual invoices displayed in this list. Otherwise, the program will not allow the invoice entry to be saved.

After this retention payment invoice has been entered and posted, it will appear as an open invoice on the Posted Invoice Listing report. It can be selected for payment and processed along with other invoices.