In the life cycle of a construction project, project settlement is considered the most important "finishing" stage. This is not only an administrative procedure to finalize the contract but also the highest legal basis for determining the actual value of the assets created through the investment.
However, with the constant changes in cost management and tax policies, the process of finalizing construction project accounts often encounters many obstacles. This article provides the most comprehensive overview of the process, documentation, and key considerations for optimizing business cash flow.
What is project settlement?
Project finalization is the process of determining the total actual costs incurred to complete a specific item or the entire construction project after it has been inspected and put into use.
It is necessary to clearly distinguish between two concepts that are often confused:
- Payment: This refers to the disbursement of funds according to the progress (stage payments) based on the estimated completed work volume.
- Settlement: This is the final, single, and legally binding figure that terminates financial obligations between the parties.
Common classifications of construction project settlements today
Depending on the financial scope and management objectives, project settlement is currently divided into two common forms, specifically:
- Construction contract settlement: This refers to determining the amount that the investor must pay to the contractor according to the terms of the signed contract.
- Final settlement of investment capital for completed projects: This is a comprehensive report summarizing all investment costs (including construction costs, equipment, project management, consulting, and other expenses) to be submitted to the competent authority for approval of fixed assets.
Whether classified according to construction contracts or the final settlement of investment capital for completed projects, each form of project settlement must adhere to a strict and consistent implementation process between technical and financial aspects to ensure the legality and value of the approved settlement.
Detailed construction project settlement procedure
This process is typically divided into two parallel "fronts": at the construction site and at the client's premises.
Step 1: Gather documents and conduct quantity survey (Contractor)
The contractor needs to conduct a thorough review of all construction logs and acceptance reports. The focus should be on determining the actual volume of work performed compared to the initial estimate.
- Use Appendix 03a for quantities in the contract.
- Use Appendix 04 for quantities arising outside of the contract.
Step 2: Prepare the project final settlement report.
The contractor prepares a final settlement value calculation sheet based on the agreed unit prices. Note that for contracts with adjustable unit prices, the accountant must update the construction price index at the time of final settlement according to local regulations.
Step 3: Review of settlement documents (Project Owner)
The investor or project management consultant will conduct a legal review of the documents, comparing the quantities between the as-built drawings and the actual construction. This is the stage where disputes regarding norms and unit prices often arise.
Step 4: Approval and settlement
After the parties agree on the figures, the project settlement report will be signed. The investor will then pay the remaining value (usually retaining 5% for warranty) and carry out the procedures for releasing the guarantee.
Complete set of latest construction project settlement documents.
To ensure that project settlement documents are approved on time and to minimize requests for additional information, businesses need to prepare complete documentation for each of the following functional groups, ensuring legal, technical, and financial compliance.
Legal documents
- Decision to approve the investment project.
- Document on contractor selection (Bidding results/Direct award).
- Building permit.
- Construction contract and its attached appendices.
Technical Documentation – Acceptance
- As-built drawings: Must be signed by the preparer, the supervisor, and the contractor's representative.
- Construction logs are kept throughout the construction period.
- Minutes of work acceptance, phase acceptance, and final acceptance.
- Results of material testing and quality control (if any).
Financial and Accounting Records
- Project settlement statement (Proposed settlement value).
- All VAT invoices have been issued according to the payment installments.
- Documentation proving that the expenses incurred are legitimate.
- Statement of accounts receivable and payable up to the present time.
Once the legal, technical, and financial documentation has been fully and consistently compiled, the next crucial step is to accurately process and reflect this data in the accounting records, which forms the basis for the project's final settlement to be approved quickly and in accordance with regulations.
Construction accounting techniques in project settlement.
Construction accounting plays a crucial role in "cleaning up" financial data in preparation for project final settlement.
Actual account accounting
Upon completion of the project, the accountant transfers the costs from account 154 (Work-in-progress production costs) to account 632 (Cost of goods sold).
- Debit Account 632 / Credit Account 154: Determine the actual cost of goods sold.
- If there is a difference between the approved settlement value and the recorded value, the accountant must make revenue/expense adjustments in the current accounting period.
After determining and fully transferring the actual cost of the project, the accountant needs to continue monitoring a specific item that directly affects cash flow and accounts receivable, which is the value retained for project warranty.
Handling warranty retention funds
Typically, the investor will retain 5% of the project's final settlement value to ensure warranty coverage.
- The contractor's accountant records it in account 131 (Accounts receivable from customers – retained portion).
- This amount will only be recovered after the warranty period has expired and a written confirmation is provided.
However, handling retained warranty funds only addresses the issue of accounts payable on paper. In reality, greater risks often arise from a tax perspective, especially VAT and Corporate Income Tax, if the business incorrectly determines the timing of revenue recognition and invoice issuance during the project settlement process.
Risks related to VAT and Corporate Income Tax.
Invoices should be issued at the time of project completion and handover, regardless of whether payment has been received or not. Issuing invoices at the wrong time carries the risk of administrative penalties and significant tax arrears.
Common mistakes when settling construction project accounts.
Through numerous inspections and audits, we have compiled a list of common mistakes that businesses should avoid:
- Incorrect application of norms: Using a norm code that does not match the actual construction method (e.g., excavating with a machine but applying a manual excavation norm code).
- The as-built drawings do not match the dimensions in the as-built drawings.
- Invoices with discrepancies in timing: Invoices for input materials are dated after the date of the acceptance report for the item using those materials.
- Lack of Certificate of Origin (CO/CQ): For imported equipment, the absence of a CO/CQ will result in the equipment cost being excluded from the final project settlement.
These aforementioned errors are the reason why many businesses experience delays in project settlement, and even face administrative penalties. Therefore, understanding the timelines and deadlines for project settlement as stipulated by law is essential for proactively controlling risks and project cash flow.
When is the final settlement of the construction project?
According to Decree 99/2021/ND-CP, the deadline for preparing the final settlement documents for completed investment projects is stipulated as follows:
- Group A projects: Within 9 months from the date of signing the completion acceptance report.
- Group B Project: Within 6 months.
- Group C project: Within 3 months.
The specific penalties are as stipulated in Decree 122/2021/ND-CP.
If the investor or project management unit violates the deadline for preparing and submitting settlement documents or delays the verification and approval of investment capital settlements, the fines are stipulated in Article 19 as follows:
- A fine of VND 10,000,000 to VND 20,000,000 will be imposed for the act of preparing investment capital settlement documents for completed projects with a delay of more than 1 month but less than 6 months compared to the prescribed deadline.
- A fine of VND 20,000,000 to VND 30,000,000 will be imposed for the act of submitting settlement documents more than 6 months late.
- Additional penalties: In addition to the fine, the violating entity is required to complete the preparation of the final settlement report and undergo proper verification in order to remedy the consequences.
Note: For construction contractors, failure to submit final settlement documents as agreed in the contract may result in penalties for breach of contract from the client or exclusion from participating in subsequent contracts with that client.
Conclude
Project finalization is not just the "closing" of a project, but also a measure of a construction company's financial management capabilities and legal compliance. Thoroughly understanding the process, standardizing documentation from the outset, and close coordination between the technical and accounting departments will help shorten approval times, minimize disputes, and safeguard post-investment cash flow.
In the context of increasingly stringent cost and tax management policies, many businesses have chosen to partner with specialized consultants in construction project settlement and construction accounting to review documents, standardize data, and proactively provide explanations when necessary. This is not only a solution to reduce risks but also a way to optimize financial efficiency sustainably.
If your business is preparing to finalize project accounts or encountering difficulties in compiling and verifying documents, consulting with experts from MAN – Master Accountant Network will significantly save time and costs and avoid unnecessary errors.
Contact information MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Mobile/Zalo: 0903 963 163 – 0903 428 622
- Email: man@man.net.vn
Content production by: Mr. Le Hoang Tuyen – Founder & CEO MAN – Master Accountant Network, Vietnamese CPA Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
Frequently Asked Questions about Construction Project Settlement
Can a construction project be finalized and paid for before it has been inspected and approved?
No. Completion and acceptance are prerequisites for final project settlement. Without acceptance and acceptance, all payments will only be at the level of advances or payments for completed work.
Is it possible to change the unit price when settling a lump-sum contract?
For lump-sum contracts, the unit price remains unchanged unless there are changes to the scope of work (extra work outside the contract) agreed upon in writing by both parties.
Why hire an independent auditor when settling project accounts?
For large-scale projects using state capital, independent audit reports are a mandatory component of the documentation submitted to the approval authority, helping to increase transparency and reliability.
MAN Editorial Board – Master Accountant Network
