Contractor Bookkeeping: Recording Advances, Progress Billings, Retention, VAT, and Final Tax by Project
In our article on contractor tax we covered final income tax rates for construction and VAT. This article covers what decides whether those taxes are calculated correctly: bookkeeping. In construction, cash in is not always revenue, and revenue is not always the tax base. Without project-level books, a contractor cannot tell which projects make money and struggles to answer the tax office’s questions.
1. Start with structure: one project, one “pocket”
Every contract should have its own project code in the books. All revenue, materials, labour, equipment rental, subcontractors, advances, and retention carry that code. That lets you see:
- contract value, total billed, and amount still to bill;
- actual costs against the budget (RAB);
- margin per project; and
- final tax and VAT linked to each billing.
Accounting software with project or class tracking helps a great deal. See our overview of accounting software for tool options.
2. Advances: a liability, not revenue
An advance from the client is not yet revenue, because the work has not been done. It is recorded as a contract liability and deducted gradually from later billings as the contract specifies.
For tax purposes, however, the advance already creates obligations:
- VAT is due when payment is received before the service is delivered, so a tax invoice is issued on the advance (for VAT-registered contractors).
- Final construction tax is withheld or self-paid on payment, including on advances.
Sample journal: an IDR 200 million advance from a PT (certified small contractor, VAT-registered):
| Account | Debit | Credit |
|---|---|---|
| Bank | 218,500,000 | |
| Prepaid final tax (1.75% withholding slip) | 3,500,000 | |
| Customer advance – Project A | 200,000,000 | |
| Output VAT (12% × 11/12) | 22,000,000 |
3. Progress billings: revenue and advance recovery
When billing progress, the contractor recognises revenue and recovers the advance in the contractual proportion. For example, billing 1 of IDR 600 million, with IDR 100 million advance recovery and 5% retention.
- Billing value (revenue): IDR 600 million
- Advance recovery: IDR 100 million (VAT and income tax on this part were handled when the advance was received)
- 5% retention: IDR 30 million
- Cash billed this period: IDR 470 million
The tax invoice and final tax are calculated on the portion not previously taxed. Common mistakes are charging VAT twice on the advance portion, or forgetting VAT on the retention portion. The treatment of retention depends on the contract and when it is billed, so set the recording method at the start of the project and apply it consistently.
4. Retention: a receivable to watch
Retention is the part of a billing the client holds until the maintenance period ends. Record it as a retention receivable per project, separate from ordinary receivables. Retention is often forgotten because it is released 6 to 12 months after handover, yet:
- final tax on retention is withheld or paid only when retention is paid, so it must be tracked;
- uncollected retention must be assessed for collectability or provisioning; and
- retention data is needed to match the client’s withholding slips.
5. Accounting revenue vs the tax base
Under accounting standards (PSAK 115, formerly PSAK 72), construction contract revenue is generally recognised over time based on progress, not when invoices are issued. Final construction tax, meanwhile, is due on payment or when it becomes payable. As a result, revenue in the financial statements can differ from the final-tax base in the same year.
The difference is normal but must be explainable. Keep a per-project reconciliation: physical progress, revenue recognised, billings issued, payments received, and final tax withheld or paid.
6. Subcontractors
When the main contractor subcontracts part of the work, it becomes the service user and must withhold final construction tax on payments to the subcontractor according to the subcontractor’s certificate. It should also obtain tax invoices from VAT-registered subcontractors so input VAT can be credited. Subcontractor costs are booked to the relevant project.
7. Monthly reconciliations to run
- Withholding slips vs billings. Every billing paid by a client should have a final-tax slip with the right amount and rate. Check in Coretax.
- Output VAT vs billings. Every advance, progress billing, and retention billed should have a matching tax invoice.
- Self-payments. For individual clients who do not withhold, make sure final tax is self-paid by the 15th of the following month.
- Project costs vs budget. Catch overruns early.
- Retention receivables. List retention falling due and its collection status.
8. Costs and final tax: keep them clearly separate
Because construction income is taxed on a final basis, costs related to it cannot be deducted from other income taxed at regular rates. Contractors with non-construction income, such as material sales, equipment rental, or deposit interest, must allocate shared costs reasonably. This is a frequent audit adjustment.
Contractor bookkeeping and tax in Bali
Agam Anand Konsultama helps contractors in Denpasar and across Bali set up project-based bookkeeping, prepare invoices and withholding-slip reconciliations, and handle monthly and annual tax reporting. See our accounting and tax services, or contact us for a free initial consultation via WhatsApp.
