Subcontractor accounting and back-to-back arrangements

Subcontracted work remains the main contractor's own performance obligation and cost, so pay-when-paid clauses cannot be used to defer accruing certified subcontractor costs - doing so understates liabilities and overstates interim margins in a sector built on deep subcontracting chains. The independent assessment of mirrored claims (subcontractor versus client) is a frequent source of provision misstatement and a specific area of audit and lender scrutiny in mega-project delivery.

Are subcontractor costs accrued when work is certified as performed, regardless of a pay-when-paid clause's cash timing? Are retentions withheld from subcontractors tracked as a payable until the contractual release conditions are actually met? Is the main contractor principal (controlling the subcontracted scope before transfer) rather than merely an agent recognizing revenue net of subcontract cost? Are subcontractor claims against the main contractor and mirrored claims against the client each assessed independently on their own merits, not automatically netted?

1) Confirm the main contractor is principal (not agent) for the subcontracted scope: it typically controls the specified good/service before transfer to the client and integrates the sub's work into its own overall performance obligation - accrue subcontract cost gross, not net of expected client recovery. 2) Accrue subcontractor cost as work is performed and certified (based on measured progress/certificates), regardless of the payment timing agreed with the subcontractor - a 'pay-when-paid' clause is a cash-timing mechanism, not a recognition deferral mechanism. 3) Track retentions withheld from subcontractors as a payable (not derecognized) until the contractual release conditions (e.g., defects liability period expiry) are met. 4) When a subcontractor raises a claim (e.g., for prolongation or variations) against the main contractor, assess it independently under IAS 37: recognize a provision if it is probable that an outflow will be required and the amount can be estimated reliably, based on the claim's own merits. 5) Separately assess any mirrored claim the main contractor has against the client (or the employer) under IFRS 15 variable consideration/contract modification guidance; do not automatically net the two - only recognize the client-side recovery if it independently satisfies the recognition threshold. 6) Reflect the sub's certified and accrued costs within the measure of progress used to recognize contract revenue on the main contract.

Measurement base: subcontractor costs are measured at the certified/accrued amount for work performed, recognized as incurred within the cost base used to measure progress on the main contract; retentions payable are measured at the amount withheld under the subcontract terms and carried as a liability until released. Provisions for probable subcontractor claims are measured at the best estimate of the expenditure required to settle the obligation, using expected value or most-likely-outcome techniques depending on the nature of the claim population, discounted if the time value of money is material. Subsequent measurement: subcontract cost accruals are trued up to actual certified amounts as work progresses; provisions are reassessed each reporting date as new evidence emerges; any client-side recovery is recognized only when and to the extent it independently meets the IFRS 15 recognition threshold, measured separately from - not netted against - the subcontractor-side provision.

Disclose significant subcontract commitments and outstanding obligations; present retention payables to subcontractors separately or with clear aging disclosure distinguishing them from ordinary trade payables; disclose provisions for subcontractor claims, including the basis of estimation and expected timing of settlement; disclose contingent liabilities for possible (not probable) subcontractor claims and contingent assets for possible client-side recoveries, without netting them against each other; disclose the accounting policy for pay-when-paid clauses confirming they do not affect the timing of cost recognition.

• Suppressing or delaying subcontractor cost accruals under a pay-when-paid clause until the client actually pays, understating liabilities and inflating interim margins
• automatically netting a subcontractor'
• s claim against the main contractor with the main contractor'
• s mirrored claim against the client, when the two must be assessed independently on their own merits and evidence
• losing track of retentions owed to numerous small subcontractors, understating payables or missing release dates
• treating the subcontracted scope as if the main contractor were merely an agent and recognizing revenue net of subcontract cost, when the contractor is principal in typical structures
• failing to reassess subcontractor claim provisions as new evidence emerges during the year.