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How to book the pro rata account?

How to book the pro rata account?

By Jennifer Montérémal

Published: October 30, 2024

When it comes to accounting, the building and civil engineering sector has its own special features and techniques.

The prorata account is one such technique. Set up when several companies share a single worksite, it enables common expenses (water, electricity, security, etc.) to be divided between the participants.

When should it be set up, and how does it work? Here's the essential information you need to know about prorata account accounting.

Prorata account accounting: definition and operation

What is a prorata account?

The prorata account is a specific account in a construction company's chart of accounts. It is set up as soon as a site is managed by several participants. Its creation is not compulsory, but it is strongly recommended to avoid conflicts between companies.

In accounting terms, the prorata account is used to record common expenses incurred on the site, i.e. those necessary for the smooth running of the work. These costs are unpredictable and difficult to calculate before the work begins.

How does the pro rata account work?

The pro rata account is used to record all charges and advance payments received, and to account for VAT. It is usually funded on a pro rata basis according to the time each company has spent on site, hence the term "prorata account".

It is used for both public and private construction contracts, and can also be used for subcontractors.

👉 A provisional budget is drawn up at the start of the worksite, and each company pays a deposit.

Accounting for the prorata account: how to set it up and manage it?

Organizing the pro rata account

The prorata account must be set up before work begins. There are no legal or regulatory provisions concerning its creation. It is the joint initiative of all building contractors, and is the subject of a management agreement between all site participants.

With this agreement, the participants agree on the creation of the prorata account, its organization, the distribution of expenses and the terms of payment.

☝️ The prorata account management agreement is important because it creates a legal link between all participating companies.

  • In public procurement, the Cahier des Clauses Administratives Générales (CCAG) Travaux makes no mention of the site pro rata account. It is therefore solely the result of a company agreement.

  • For private contracts, AFNOR standard NF P03-001 makes explicit reference to common interest expenses and the pro rata account in article 14, as well as in appendices A, B and C. It proposes provisions to facilitate the implementation and management of the prorata account.

Who manages the prorata account?

The management of the prorata account is entrusted to a manager, the owner of the most important lot (usually the shell).

This manager is responsible for issuing pro rata invoices or calls for funds. Very often, the manager also advances funds to cover common expenses.

☝️ Accounting entries are validated by a control committee.

Accounting for the pro rata account

Expenses common to all construction companies working on the same site, also known as "common interest" expenses, are charged as soon as prices are received.

Expenses covered by the pro rata account

Pro-rata account expenses represent common consumption costs, including :

  • cleaning and upkeep of the premises ;
  • water, electricity and gas;
  • cleaning the site office and hygiene facilities;
  • making the site safe...

☝️ Supplies or works intended to be received by the project owner, as well as costs which have not been determined in the contract documents, do not constitute expenses of common interest.

Allocation of charges to a pro rata account

The project manager lists all expenses and distributes them among all parties involved, according to the allocation methods defined in advance.

Common expenses can be allocated either on a lump-sum basis, or on a settlement basis. The latter is the most common option.

  • If expenses are allocated on a pro rata basis, the manager draws up a pro rata account tracking table. He enters the actual expenses and distributes them among the participants in proportion to the amount of their contract. At the end of the project, the manager draws up the final statement and submits it to each company. Expenses are then deducted in proportion to the amount of each company's invoice. Depending on the advance payments made by the companies and the final account, any excess amounts are refunded.

  • In the case of lump-sum distribution, the costs concerned by the pro rata account are specified at the start of the project. Each contractor pays his own share. The manager is not required to justify expenses recorded in the pro rata account.

Accounting for the pro rata account: how do I account for an invoice?

Accounting for the pro rata account varies according to the status of the company (manager or user).

  • For the manager, expenses are included in the usual expense account. Calls for funds are recorded in a revenue class account (701).

  • For users, calls for funds are recorded in a subdivision of account 604000 (purchases of studies and services).

💡 Tip: the use of software specific to the building sector is recommended to easily account for the prorata account.

One example is Graneet, a commercial and financial management solution designed for SMEs in the construction industry. It gives these professionals greater visibility of all site-related costs, enabling them to accurately track shared expenses. What's more, Graneet integrates pro rata accounts into the automatic calculation of various invoices. In short, this software is sure to make your financial processes more reliable!

Closing the pro rata account for accounting purposes

Once the work has been handed over, the manager closes the pro rata account. He sends each professional the charges to be paid in this respect. The contractors then have 15 days in which to submit their observations.

In order to balance the pro rata account in the accounts, it is necessary for revenues excluding taxes to be equal to expenses excluding taxes. The control committee (or management committee) verifies and validates the balance of the prorata account, as well as the allocation of expenses.

Once the prorata account has been approved, the manager issues invoices for each company. He or she then collects any remaining sums or returns any surplus funds.

Other specific accounting features of the construction industry

In addition to prorata account accounting, the building and civil engineering sector has other specific invoicing requirements.

  • Down-payments are advances of funds requested before the work is carried out. They can amount to up to 40% of the total cost.

  • Interim progress reports are issued as work progresses.

  • Three rates apply, depending on the nature of the work. It is possible to have two different rates on the same invoice:
    • the reduced VAT rate of 5.5% covers energy-improvement work;
    • intermediate VAT at 10% for renovation work;
    • the standard VAT rate of 20% applies to new-build work.
  • Upon acceptance of the work, the customer has the right to deduct a sum from the total invoice amount. This is known as the " retention de garantie ". This sum, which generally corresponds to 5% of the cost of the work, enables the customer to ensure that the work has been carried out properly. If no defects are found, the retainage is returned after one year.

Prorata account and accounting: a summary

The prorata account is set up when several companies work on the same site. It is used to apportion the costs of work (electricity, water, site cleaning, etc.) between all participants, on a time or lump-sum basis, and in proportion to the time spent by each. It is administered by a manager (usually the shell company) who records expenses and draws up invoices, and is validated by a control committee.

The accounting of the prorata account is a specific feature of the building and civil engineering sector, as are down payments, interim statements of work, VAT rates and the guarantee deduction.

Article translated from French