Construction and Property Development Accounting: Joint Ventures, Presales and Tax

This is written for developers, parties to joint construction agreements, and accountants keeping the books of a building project. Three questions drive everything: where project spending accumulates, when revenue is recognised, and how the tax and insurance burden is anticipated rather than discovered. In the project files I have handled, real margin was usually well below what the builder believed — and incomplete cost accumulation was almost always the reason.

First decide what you are: contractor or developer

Firms doing both — common enough in practice — need two separate activity centres in the system, or cost accumulation becomes meaningless. The contractor side is covered in the contracting accounting article.

Building project cost properly

The work in progress account, kept per project and preferably per block, should absorb every attributable cost:

• Land cost, or the value of the land share received under a joint agreement
• Permit fees, density charges, site preparation and utility connections
• Materials, direct labour and subcontractor billings
• Design, supervision, laboratory testing and site engineer fees
• Construction workers' insurance and the project's social security settlement
• Attributable borrowing costs during the construction period
• Site overhead: site office, security, storage, haulage

The two items most often missed are borrowing costs and the insurance settlement. Finance costs attributable to the construction period form part of the qualifying asset's cost and must stop being capitalised once the units are ready. And an insurance settlement that was never budgeted will consume project cash exactly when the last units are being finished.

Allocating shared costs between units

Shared block costs must be allocated. The two common bases are usable floor area and relative sales value. Where units differ sharply in price by floor, view or position, relative sales value gives a far more sensible answer; area-based allocation makes premium units look artificially profitable and lower units look loss-making. Document the basis chosen and keep it constant through the project.

Joint construction agreements

Points to settle in the contract before they become accounting problems:

1. Each party's share stated by specific unit and area, not just as an overall percentage.
2. The timing and mechanism for transferring the land share to the developer.
3. Who pays municipal charges, commission penalties and unforeseen costs.
4. Which side bears the transfer tax at each stage.
5. Responsibility for settling subcontractors and obtaining the insurance clearance.
6. Termination mechanics and treatment of costs already incurred if the project halts.

The developer records the value of the land received within the cost of its own units; the landowner should understand that transferring the land share is itself a taxable transfer event.

Presales and revenue recognition

Amounts received from presale buyers are advances until handover, not revenue. Revenue arises when the significant risks and rewards of ownership pass — in practice, handover together with a definitive transfer and substantial settlement of the price. At that point the unit's accumulated cost leaves work in progress and becomes cost of sales. The underlying principle is set out in revenue recognition and the accrual basis. Note also that presale contracts carry their own legal formalities; an informal agreement is weak both legally and as tax evidence.

The tax layers of a project

• Property transfer tax (Article 59): charged on the assessed value fixed annually by the property valuation commission, at the statutory rate, with a separate rate for transfers of goodwill or leasehold rights.
• Build-and-sell tax (Article 77): the first transfer of a newly built property attracts an on-account tax based on the assessed value of the built area, in addition to Article 59, and the development profit is examined as business or corporate income depending on the builder. Exceptions apply, including a defined period after completion and certain smaller towns — verify per project.
• Corporate income tax: for a corporate developer, project profit after cost is taxed at the 25 percent rate under Article 105, with on-account payments creditable.

Insurance and subcontractors

A building project runs on dozens of small subcontracts. Put two obligations in every one: withholding tax under Article 104 where it applies, and retention of part of the contract value until the insurance clearance is produced.

Project control indicators

• Physical progress against budget consumed
• Cost per square metre to date against the original estimate
• Advances received against costs incurred, the core liquidity measure
• Unsold units and their carrying value
• Outstanding subcontractor commitments and unsettled insurance clearances

Key takeaways

• A developer is not a contractor; the project is inventory, not a contract asset.
• Borrowing costs and insurance settlements are the two forgotten cost components.
• Presale receipts are a liability until handover.
• The joint construction agreement must assign every tax and municipal charge explicitly.
• On-account tax payments are only creditable if the receipts are in the file.