Introduction: As per the Ministry of Corporate affairs notification G.S.R.429 (E) dated 3rd June 2011 as well as clarification issued on 25th May 2012, companies engaged in Construction (including development of real estate) industry who meets with the threshold limit laid down in rule 3 of the Companies (Cost Accounting Records) Rules 2011 shall be required to maintain cost accounting records and file the compliance report with the Central Government. This rules have prescribed that cost accounting records are required to be maintained in accordance with “Generally Accepted Cost Accounting Principles“ and “Cost Accounting Standards“ issued by the Institute of Cost Accountants of India to the extent these are relevant and applicable. These rules do not specify any specific format of cost statement and the company is free to adopt a system suitable to provide the cost information.
Meaning of Construction activity: The Construction activity which, inter alia includes building / re-building / restoring structures or infrastructure facilities, typically using civil, mechanical or other branches of engineering.
Features of a Construction Contract/project:
a. Execution of projects as a contractor / sub-contractor or as a developer.
b. Projects involving design, detailed engineering, procurement, manufacturing / fabrication, installation, commissioning.
c. The contracts / projects are finalised normally through a bidding process and the projects are executed as per client’s requirements at client’s project site.
d. The client normally makes payment based on the progress of work as per the contract.
e. Contracts also normally stipulate work / quality certification by a client nominated third party consultant.
f. Contracts also lay down performance guarantee conditions, warranty / defect liability period, liquidated damages for schedule delay, price variation clause if any, client’s obligations during construction period, method to be followed for any change in scope of work, claim management, force-majeure clause, arbitration etc.
g. The duration of a project may vary from project to project for different industries. Normally the projects are of long duration (more than 12 months) and revenue is recognised generally based on Accounting Standard (AS-7) notified by Government of India, Ministry of Corporate Affairs.
Applicability of CARR for various construction projects modals is given below:
PPP model: Project under Public Private Partnership (PPP) arrangement, i.e. development, financing, constructing, maintenance and operation, are implemented for the Project Term by a Private / Public Sector Company to be selected by the Government or a statutory entity. The primary business model is Build, Operate and Transfer. CARR will be applicable from the time the Company starts building or constructing the project (either by themselves or through contractor) after getting necessary approvals for commencement of work from appropriate government / local authorities.
The PPP Projects are usually in the following sectors:
a. Roads and bridges, railways, seaports, airports, inland waterways, hotels;
b. Power generation, transmission etc.;
c. Urban transport, water supply, sewerage, solid waste management and other;
d. Physical infrastructure in urban areas;
e. Infrastructure projects in Special Economic Zones.
a. Industrial and mining infrastructure,
b. Highways, roads, ports, railways, airports etc.,
c. Rapid Mass Transport System,
d. Water Supply System,
e. Bulk Material Handling System,
f. River Linking Projects,
g. Sewerage System,
h. Solid Waste Management,
i. Power systems,
j. Irrigation and agriculture system,
k. Telecommunication system.
PPP Projects normally operate on the following basis:
a. BOO - Build Own Operate.
b. BOLT - Build Own Lease Transfer.
c. BOOST- Build Own Operate Share Transfer.
d. BOT - Build, Operate and Transfer.
e. BOOT - Build, Own, Operate and Transfer.
f. BOLT - Build Own Lease Transfer.
g. BLOT - Build, Lease, Operate and Transfer.
h. DBFO - Design Build Finance Operate.
i. DBFOT - Design, Build, Finance, Operate and Transfer.
j. EPC - Engineering, Procurement and Construction.
k.OMT - Operate Maintain Transfer.
EPC Contracting Model: The business model is primarily Engineering, Procurement and Construction. CARR will be applicable from the initial stage of Engineering or Procurement or construction activity, as applicable. The EPC Contracting model is normally used for executing a construction contract awarded either by Govt. or Private Player. These contracts are finalised normally through a technical and commercial bidding process and the projects are executed as per client’s requirements at the project site.
Examples of commonly used models of EPC contracts are:
a. LSTK-Lump sum turnkey contracts.
b. Cost plus contracts.
c. Item Rate Contract.
d. A Combination of above.
Real Estate Development Model: The business model is primarily development and sale of real estate. CARR will be applicable from the start of development /construction activity on getting necessary approvals for commencement of work from appropriate government / local authorities. Real estate development is the act of purchasing land, real estate, and making improvements to the land and / or existing buildings on it and / or new construction either by themselves or by contractors and selling the property after development. Developers purchase the land / real estate from Government / existing owner.
Some commonly used models of Real estate development are:
a. Green field development. (Traditional model)
b. Redevelopment model.
Examples of Real estate development projects are:
a. Housing, Land and Township Infrastructure Development.
b. Development of commercial real estate.
c. Development of Corporate IT parks.
Construction involving in-house fabrication or manufacturing: The business model involves engineering, procurement, manufacturing / fabrication, construction and / or installation / commissioning. Hence CARR will be applicable from the initial stage of Engineering or Procurement or Construction activity, as applicable. Companies, as Developer or Contractor, may have in-house facilities for undertaking long duration (more than 12 months) manufacturing / fabrication of equipment / structures for use in the main construction project. These equipment / structures are manufactured / fabricated as per client’s design, specification and other requirements, which are unique for each contract. Materials are either procured by the Company or provided by the Client based on the terms of contract. The business model generally involves engineering, procurement, manufacturing / fabrication, transportation to project site and installation / commissioning in the main construction project.
Examples of in-house fabrication or manufacturing used for construction projects are:
a. Cement concrete slabs, beams, columns etc. for infrastructure projects.
b. Reactors for Chemical Plants.
c. Heat exchangers for Fertilizer Plants.
d. Process platforms for Oil & Gas exploration projects.
e. Transmission towers for power transmission line projects.
Exemption from these rules:
a. As per MCA's General Circular No. 67/2011 dated 30th November 2011 (annexed as annexure III) companies engaged in construction business as contractors or subcontractors wherein they are paid only the conversion charges are exempted from the applicability of companies (Cost Accounting Records) Rules, 2011.
b. Companies (Cost Accounting Records) Rules, 2011 do not apply to such Joint Ventures that are non-corporate entities [i.e. not companies registered under the companies Act] or to unlisted companies that are below the specified threshold limits or to a body corporate governed by any special Act.
c. These rules will not apply to construction activity which is not meant for sale or for commercial use. For example, a company not engaged in construction business, but constructing staff quarters for its employees or erecting manufacturing plant, will not be covered under the maintenance of CARR relating to Construction activity.
CMA Ramesh Krishnan
Source: Guidance notes on Cost Accounting records by Constructions Industries –“The Institute of Cost Accountants of India”