Principal versus agent in subcontracted scope

Grossing up revenue and cost for subcontracted scope where the entity is actually acting as agent (or netting to a fee where it is actually principal) directly misstates both revenue and gross margin percentage, which are the two headline metrics analysts, lenders and prequalification committees use to compare contractors, this is one of the most consequential presentation errors in the sector because it can misrepresent the entity's true scale and bargaining power without changing net profit at all.

Is your entity primarily responsible for fulfilling the promise to the employer, including responsibility for defects in the subcontracted work, rather than the nominated subcontractor bearing that responsibility directly? Does your entity have discretion in selecting the subcontractor and setting the price charged to the employer, or is this dictated entirely by the employer's engineer? Does your entity bear inventory risk or credit risk before the specialist work is transferred to the employer? Is revenue currently being grossed up for subcontracted scope where the substance of the arrangement actually indicates an agency role, or netted where it indicates a principal role?

1. Identify the specific good or service to be provided to the employer (which may be the overall project or a distinct, separately identifiable component such as a nominated specialist package).
2. Determine whether the entity controls that specific good or service before it is transferred to the employer, control indicators include primary responsibility for fulfilment, inventory risk before transfer, discretion in setting price, and exposure to the subcontractor's performance risk.
3. If the entity controls the good or service before transfer, it is the principal: recognize gross revenue (from the employer) and gross cost (paid to the subcontractor) for that scope.
4. If the entity is arranging for another party (e.g. a nominated subcontractor selected and largely controlled by the employer/engineer) to provide the good or service, it is the agent: recognize only the net fee or commission retained as revenue.
5. Apply the assessment consistently to similar arrangements (nominated versus domestic subcontractors may differ in outcome) and reassess if the contractual or practical control indicators change.

The assessment is based on control indicators applied to the substance of the arrangement, not merely on who issues the invoice to the employer or the legal form/label of the subcontract; consistent application across similar arrangements within the same entity is important for comparability. Where acting as principal, measure gross revenue and cost consistently with the entity's own IFRS 15 model for the overall contract (including any over-time progress measurement applied to the subcontracted scope); where acting as agent, measure the net fee based on the actual commission or margin retained per the arrangement.

Disclose: (1) the accounting policy and significant judgments applied in principal-versus-agent assessments, particularly for nominated or nominated-equivalent subcontract arrangements; (2) disaggregation of revenue distinguishing gross (principal) contracts from net (agent) fee arrangements where material; (3) the nature of arrangements where the entity acts as agent and the basis for that conclusion.

• Defaulting to gross (principal) presentation for all subcontracted scope simply because the main contractor issues a single consolidated invoice to the employer, without assessing actual control
• treating a nominated subcontractor imposed by the employer as automatically an agent relationship without confirming the main contractor genuinely lacks control (it may still bear primary responsibility and performance risk, pointing to principal)
• applying inconsistent principal/agent conclusions to economically similar subcontract arrangements across different projects
• failing to reassess the conclusion when a subcontract is later amended to shift risk and responsibility.