Revenue recognition is the central accounting challenge for architectural and engineering practices. Under AASB 15 Revenue from Contracts with Customers, revenue on a fixed-fee engagement is recognised as the performance obligation is satisfied — not when the invoice is raised and not when the cheque is banked. A firm that raises progress invoices at project milestones may have invoiced ahead of the work performed (creating a contract liability) or behind the work performed (creating a contract asset). The bookkeeper's job is to maintain the WIP schedule that tracks the gap between invoiced amounts and earned revenue throughout each project.
WIP Valuation Under AASB 15
For professional service firms engaged on fixed-fee or schedule-of-rates contracts, AASB 15 requires revenue to be recognised using a measure of progress — either the input method (costs incurred as a proportion of total estimated costs) or the output method (milestones achieved, surveys of performance completed, or percentage completion). The choice of method should reflect the way in which the entity satisfies the performance obligation.
Architectural and engineering firms most commonly use the percentage-of-completion method based on professional judgement of stage of completion, validated against hours incurred. For a $200,000 design contract that is assessed at 60% complete at period end, $120,000 of revenue is recognised — regardless of whether any invoice has been raised.
The journal for unbilled WIP is: debit Contract Asset (or WIP receivable), credit Revenue. When the invoice is subsequently raised, the contract asset is reclassified: debit Accounts Receivable, credit Contract Asset. Confusing contract assets with accounts receivable on the balance sheet misstates both liquidity ratios and the age of the firm's receivables.
Progress Billing and Contract Liabilities
Many architectural contracts are structured around project stages: Schematic Design, Design Development, Construction Documentation, Construction Certificate, and Site Administration. A client may pay a deposit at engagement commencement and then progress payments at the completion of each stage.
Where the invoicing schedule front-loads payments ahead of performance — for example, a 20% deposit invoiced before any design work is commenced — the deposit creates a contract liability (unearned income) until the corresponding performance obligation is met. The contract liability must appear on the balance sheet and must not be included in revenue until earned.
Conversely, where work is performed ahead of invoicing — a common position at year-end for ongoing projects — the accrued but uninvoiced revenue creates a contract asset. The distinction between a contract asset and a trade receivable matters: a trade receivable is an unconditional right to receive cash (only time needs to pass); a contract asset is conditional on the firm completing further performance obligations before it can invoice.
Retention Amounts
Retention provisions appear most frequently in construction contracts where the architect or engineer is engaged by the head contractor rather than the owner. The contractor retains a percentage — typically 5% — of each progress payment until practical completion, providing security against defects.
Retention balances are earned revenue that has not yet been collected. They should be recorded as a distinct retention receivable — not written off, not netted against unbilled WIP, and not included in a catch-all creditor balance. A separate ledger account for contract retentions, reconciled to the schedule in each contract, allows the firm to monitor the total retention exposure and identify balances that have been held beyond the contractual defects liability period.
Retentions that exceed the defects liability period without release should be followed up actively. In some jurisdictions, a statutory trust framework (such as the Project Bank Account regime in Queensland under the Building Industry Fairness (Security of Payment) Act 2017) applies to retention money for certain construction contracts — requiring the retention to be held in a dedicated account. Bookkeepers managing engineering subcontractors on Queensland projects should confirm whether the project bank account requirements apply.
Professional Indemnity Insurance and Prepayment Deductions
PI insurance for design professionals is almost always prepaid annually, with premiums typically due at the policy commencement date. For SBE firms, the full premium is immediately deductible under the prepayment exception in s.82KZL of ITAA 1936, provided the eligible service period does not extend more than 12 months from the date of payment. A premium paid on 1 October for a policy period ending 30 September the following year satisfies the 12-month test.
For non-SBE firms — large engineering consultancies, for example — the prepayment rules in s.82KZM require the premium to be apportioned. A premium paid on 1 October for a 12-month policy is deductible as to 9/12 in the current income year (October to June) and 3/12 in the following year (July to September). The bookkeeper should ensure the asset "Prepaid PI Insurance" is amortised monthly and does not remain on the balance sheet as a static asset for the full year.
TPAR Obligations for Design Firms
The Taxable Payments Annual Report (TPAR) applies to entities that make payments to contractors for services in certain industries. Architectural and engineering firms that engage subcontractors for drafting, structural calculations, geotechnical surveys, traffic engineering, or site supervision must report those payments via TPAR if their total payments to contractors for building-related services exceed $75,000 in the income year.
The TPAR threshold for building and construction services is lower than for some other sectors and has been a catch for mid-size firms that are clearly not in the "building and construction" business in the traditional sense but are caught by the ATO's broad interpretation of "building-related services." The ATO's guidance includes architectural drafting and structural engineering calculations within the scope of reportable building-related services.
Each payment to a contractor must be reported by ABN, name, address, and gross amount paid including GST. Where a contractor has not provided their ABN, the firm was required to withhold 47% from the payment under the withholding provisions in s.12-190 of Schedule 1 to the TAA 1953. TPAR is lodged by 28 August each year. The bookkeeper should ensure contractor records are maintained throughout the year so the August lodgement does not require reconstructing a year's worth of payment data from bank statements.