Best way to account for sub-contracted billable time

[kevinb456]

Hi All,

Sorry this is so long…but best to be precise and explain what I’m trying to achieve!

I work a lot on hourly pricing, and so use Billable Time. I’m going to be bringing a couple of sub-contractors on, who then Invoice me for their time, similarly accrued hourly.

I understand that their billing to me is in the form of a Purchase Invoice which I pay off, the same as any other supplier. But then when charging my customer for this sub-contracted time I would like to achieve a few things:

1. Bill the time to my customer at a higher hourly rate - and easily see the markup.
2. The sub-contractors Expense to appear in the same period as the hours which caused it - if a lump sump falls across the month/quarter/year boundary then the Income will be in one period and the Expense in another and I will no longer be able to compare business performance across periods.
3. Have the data in manager to be able to produce a Custom Report of the hours; both mine and sub-contractors (effectively time sheets).
4. Not be too admin intensive in Manager as this will be a frequent thing.

I can then see two OK ways of doing this, but neither is quite what I’d hoped for;

• Record sub-contractors Invoice as a Billable Expense. I can then add to my Invoice as “PersonA - WeekX Hours” (Although the word “Hours” wouldn’t show in the Qty column for a billable expense).

  • 1 - achieves this point well
  • 2 - sort of; Income and (Billable) Expense can at least occur at the same time, though they’re after the hours which caused them which may affect the next periods results rather than when the work was performed.
  • 3 - not at all, sub-contractors time data not entered
  • 4 - Good in the sense adding a Billable Expense to an Invoice is easy, but extra work to manually consolidate my Billable Time to match the same single-line format on the Sales Invoice.

• OR Record sub-contractors Invoice to a special “Subcontractors” Expense Account, and enter the sub-contractors hours (based on timesheets they send) into Billable Time.

  • 1 - Can’t see the Cost vs. Invoiced directly as easily, although at least the Expense part is visible on the summary
  • 2 - Far worse; depending on when the sub-contractors Invoice me, the Billable Time Income could be weeks or months before the Expense and will sway everything by thousands and make it very difficult to compare performance across periods.
  • 3 - Yes! I will have all the sub-contractors time data, same as mine
  • 4 - Not ideal as I have to enter their time, but at least that feels purposeful to achieve 3.

Sooooooo

• Which of these do you think is best?
• Can you see any way round the disadvantages?
• And the $million question - is there some way I’m not thinking of, of effectively having a functionality similar to Billable Time but the opposite way round - purchasing Billable Time rather than selling it? - i.e. accrue as a Liability until such time it is (Purchase) Invoiced, rather than accruing as an Asset until it is (Sale) Invoiced?

And of course thank you for this excellent software, and any help you’re able to give, it is much appreciated!

Kevin

[Tut]

@kevinb456

Record sub-contractors Invoice to a special “Subcontractors” Expense Account, and enter the sub-contractors hours (based on timesheets they send) into Billable Time.

This second option is a non-starter. The subcontractors hours are not billable time of your business.

Billable time, when first recorded, is an asset, because it can later produce income. The debit of the asset is balanced by a credit to the income account, Billable time - movement. The act of invoicing transfers that credit to Billable tie - invoiced. This is what your first option does.

Time billed to you by subcontractors is never an asset. If you record it initially via purchase invoices, it shows temporarily as a liability, a credit, balanced by a debit to a suitable expense account, such as your Subcontractor expense account. When you make payment, the credit in Accounts payable is transferred to your bank account. Another way to think about this part of the workflow is to imagine you did not enter a purchase invoice, but just entered a payment transaction. You would be crediting your bank account and debiting the Subcontractor expense account.

You would be on the right path to use Billable Expenses. Subcontractors are, in effect, expenses you incur on behalf of your customer. The customer could also have contracted directly with the subcontractors. In the same way, a customer could purchase airline tickets for your travel, or you can purchase them as billable expenses, which is easier for your customer.

As it turns out, you seem to have realized all this, as evidenced by the last bullet point in your post. I think you just didn’t realize the full ramifications. While it is often difficult to comprehend, it is often useful to reduce everything to debits and credits in order to understand how to use your accounting software.

[kevinb456]

@Tut

This second option is a non-starter. The subcontractors hours are not billable time of your business.

As you say, the sub-contractors charge to me is always an expense and not an asset - but that’s only one side of it. Each hour they work has both - an expense (what they charge me), and an income-earning potential (what I bill to my customers). Why can the second part, distinct from the first, not be viewed as billable time?

@Tut

Billable time, when first recorded, is an asset, because it can later produce income.

Just like this. I’m only talking about treatment of the income-earning work done by the subcontractor for my business. The hours a sub-contractor works can later produce income from my customers. It’s a similar concept to employee hours costing the company expense, but also having income producing potential.

The full solution would, I think, require extra features in Manager to be able to pair up both the expense-costing and the income-earning impact of a sub-contractors hours (so each hour has two sides to it and results in a liability/expense at £X/hr, PLUS an asset/income at £X+markup/hr).

However I’m not really asking for this right now as it sounds a tall-order, this is just to explain where I’m coming from.

What I’m really asking is with the existing Manager, how did I best approximate this? The two options above were my best attempts, but neither are quite what I’d hoped for. At the end of the day it’s just a tool and I need to find the best way of using it for my business. Maybe it’s just not that suitable, which is an OK answer too.

[Tut]

@kevinb456

Each hour they work has both - an expense (what they charge me), and an income-earning potential (what I bill to my customers). Why can the second part, distinct from the first, not be viewed as billable time?

What you describe is a billable expense, not billable time. Billable time is an asset you create within your business by the application of labor. There is no corresponding expense.

@kevinb456

The hours a sub-contractor works can later produce income from my customers.

Yes, you can invoice the customer for the expense you incurred when you obtained that work from your subcontractor. But you did not create the value, the subcontractor did. From your business’ perspective, that was an ordinary expense, just as though you bought a part from a supplier and installed it in the customer’s machine for a repair. In such a situation, you created the value of the repair labor, but you purchased the value of the repair part.

@kevinb456

The full solution would, I think, require extra features in Manager to be able to pair up both the expense-costing and the income-earning impact of a sub-contractors hours (so each hour has two sides to it and results in a liability/expense at £X/hr, PLUS an asset/income at £X+markup/hr).

No extra features are required, because the situation of subcontracted labor does not have “two sides.” It is an expense. If you treat it as a billable expense, the debit is temporarily intercepted in the Billable expenses asset account. When you invoice the billable expense (the subcontractor’s time), the debit goes to Billable expenses - cost and is balanced by a credit to Billable expenses - invoiced. The difference between those two accounts reflects your markup, if any.

Now, you don’t have to use Billable Expenses to do this. You could just post the subcontractor’s invoice to some expense account (like the Subcontractor expense account you mentioned earlier) and enter it manually into a suitable income account as you invoice. That is effectively what the Billable Expenses module does for you.

@kevinb456

What I’m really asking is with the existing Manager, how did I best approximate this?

Use your first option. To achieve your four goals:

• 1 - Already done, as you observed
• 2 - Insist as a condition of the subcontract that your subcontractors bill you in the same accounting period as the work is performed. Many large businesses do this, some providing online portals for their subcontractors to enter time. The entry is equivalent to a sales invoice, which you would record in Manager as a purchase invoice.
• 3 - The time data can be entered in the purchase invoice from the subcontractor’s sales invoice. What you really said in your opening post was that the subcontractor’s time is not entered as billable time. But I’ve explained why that would be an accounting fallacy.
• 4 - Already achieved. Trust me, invoicing billable expenses is very easy. Just make sure to do it from the Customers tab and create the invoice first. Then, if there are other things to add, edit the resulting sales invoice. You cannot add billable expenses to a sales invoice you’ve already created.

[kevinb456]

Thanks for persevering and your help. I think I’m getting the point you’re making. Let me know if I’m on the right lines! Say for examples sake, £100 sub-contractor, charged to my customer at £150.

“Billable Time” Method - £150 Revenue, of which £150 Income, £100 Expense, £50 Profit
“Billable Expense” Method - £150 Revenue, of which £50 Income, £100 Billable Expense, £50 Profit

@Tut

But you did not create the value, the subcontractor did.

This being the main difference - in which entity the original £100 sub-contractor value is realised. That makes sense and I agree from a strictly accounting point of view.

However in terms of the purpose the physical work is being done for; the company name it is under (from the point of view of my customers), the processes & tools used, sometimes premises it is being done under, and certainly for the impression I want to give, the work is done by my company, even if under-the-hood there are other arrangements in an accounting sense.

The Revenue & Profit end up identical either way and I’m not mis-representing any numbers which make it on to my tax return so what would be the actual real-world implication of doing this?

What I would really like to achieve is to be able to generate nice timesheets as below, from “Custom Reports” with all staff shown (both internal and sub-contractors). If to achieve this I just have to re-order some digits in my accounting with no real world impact then that may be the price to pay to get the tool working the way the business needs it to.

Other tools, e.g. Zoho books, do allow this function as my friend uses it like that - a sub-contractor enters time into the accounting program of the company they’re working for, and this then also appears on the end customers invoice at a higher rate, and also is visible alongside other workers time entries. I’d be interested to know what method they use in an accounting sense under the hood and if I could emulate it in Manager.

[Tut]

@kevinb456

“Billable Time” Method - £150 Revenue, of which £150 Income, £100 Expense, £50 Profit
“Billable Expense” Method - £150 Revenue, of which £50 Income, £100 Billable Expense, £50 Profit

You are confusing terminology. Revenue and income are the same thing. Call things what you will, you have £150 of income, £100 cost, £50 profit. Put your “Billable Time” fantasy out of your head, because your company has no billable time for your subcontractor. For the “Billable Expense” scenario, the income recognize when you invoice your customer is composed of £100 that matches the expense you had for the subcontractor and £50 pure markup.

@kevinb456

I agree from a strictly accounting point of view.

That is the only point of view that matters in an accounting system.

@kevinb456

The Revenue & Profit end up identical either way and I’m not mis-representing any numbers which make it on to my tax return so what would be the actual real-world implication of doing this?

The point is that you are misrepresenting numbers. Let me illustrate. On February 1st, a subcontractor performs work for your customer, Brilliant Industries. You enter that as 2 hours of billable time at £75/hour. Your otherwise pristine financial statements look like this (ignore the balance sheet date, since I am entering all this today):

Both your Balance Sheet and Profit and Loss Statement are wrong. You have no asset in the Billable time account, as you’ve already agreed. And you have income in Billable time - movement for which there is no basis. Your income is now overstated for tax purposes.

On February 2nd, your subcontractor sends you a sales invoice for 2 hours at £50/hour, which you enter as a purchase invoice. This is the result:

Billable time is still wrong. Billable time - movement is still wrong. And Retained earnings is wrong, because your business has not created any value (which is why Billable time is wrong) and you have not invoiced the customer.

On February 3rd, you invoice the customer. The financials now show:

Since all your banking is done online, the same day, you receive £150 from the customer and pay your subcontractor. The final result is:

At this point, everything appears to be correct. But what if your subcontractor doesn’t send the invoice to you until the following month? What if you fall behind on paying your subcontractors? At various points in time, your financial statements misrepresent either your position or your performance or both. And what do you do about that if the tax auditor walks in the door tomorrow? You have records that cannot be justified. (We haven’t even addressed tax issues. I presume your subcontractor’s labor is subject to VAT.)

Whether the bottom line looks correct or not, your records need to reflect what actually happened at every stage. Don’t expose yourself to penalization for the sake of a pretty report just so you can look like a bigger operation than you are. If you want to convey a certain image to customers, you may need to create reports outside your accounting system.

[kevinb456]

Thanks for the worked example. I follow the letter of what you’re saying, but not so much the spirit. I guess I don’t see the gravity of the issue, or why you can’t consider the value to be created within the company (just like you don’t treat wages as a billable expense; they’re both paying someone else money to do the work). It’s all ‘correct’ in your sense at the end and I can ensure it is by doing this:

@Tut

Insist as a condition of the subcontract that your subcontractors bill you in the same accounting period as the work is performed

Plus…

@Tut

Both your Balance Sheet and Profit and Loss Statement are wrong. You have no asset in the Billable time account, as you’ve already agreed.

…now I’ve gone full circle in my thinking!.. it definitely feels like an asset. I know I will be able to convert it into income in the future. Surely that’s a valid use of an asset.

Anyway, this could go round and round - and I probably don’t need to drag you around with me while I educate myself!

So I will close and say thank you very much for your help and patience. I will discuss this specific point with my accountant and just go with whatever they say.

[Tut]

@kevinb456

it definitely feels like an asset.

In accounting, feelings are irrelevant, @kevinb456. You don’t have an asset, you have a liability in the form of a payable. The same thing cannot be both an asset and a liability. What you propose is little different from simply making up inventory because one day in the future you expect a supplier to sell it to you. That’s generally considered a crime.

@kevinb456

I will discuss this specific point with my accountant

Good idea.