Maintenance period cost

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Querist : Anonymous

Querist : Anonymous (Querist)

08 January 2013 After completion of a Project, there will be a post project maintenance period. Say for Example 1 year free maintenance. During this Period the Company spends some money for Materials, Labour and Other Maintenance Exp. My question is, are these expenses belongs to the project or General Repairs and Maintenance Exp.? If it is a Project Expenses where and how to account it? Could anyone give me a detailed explanation?

CA Lokesh Pokharna

CA Lokesh Pokharna (Expert)
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08 January 2013 post project completion expenses capitalization depends on terms & conditions of project auqisition...
if these are substantial in amount then should be capitalized.....

Querist : Anonymous

Querist : Anonymous (Querist)

20 January 2013 Thank you Mr. Lokesh,

If you could explain me the answer in detail i will be happy.

Also please explain me how to treat a prior period project cost for Ex. drawing, quoting exp.... and related labour cost of the Designing Engineer and Quantity Surveyor.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 ### **Maintenance Period Costs:**

**1. Maintenance Costs During Post-Project Period:**

After the completion of a project, if there is a maintenance period (such as a one-year free maintenance), the costs incurred during this period for materials, labor, and other maintenance expenses should be accounted for as follows:

**1.1. Classification:**

- **Project vs. General Repairs and Maintenance:**
- **Project Expenses:** Costs incurred during the maintenance period that are related to fulfilling the terms of the contract or warranty are considered part of the project's cost of completion. These expenses are typically not classified as general repairs and maintenance, as they are part of the contractual obligation.
- **General Repairs and Maintenance:** Costs that are not related to the contractually obligated maintenance period but are part of regular upkeep or repairs would be classified as general repairs and maintenance.

**1.2. Accounting Treatment:**

- **Project Costs:**
- **Capitalization:** If the costs relate to maintaining or rectifying defects in the project as part of a warranty or contract obligation, they are typically recorded as project costs or as part of the project’s cost of completion. This ensures that these costs are included in the total cost of the project.
- **Expense Recognition:** In the project accounting records, these costs should be capitalized and included in the project cost rather than expensed immediately. This is done to match the expenses with the revenue recognized from the project.

- **Accounting Entries:**
- **During the Maintenance Period:**
- **Debit:** Maintenance Expense Account (or Project Cost Account)
- **Credit:** Accounts Payable/Cash

**2. Prior Period Project Costs:**

Costs related to a project incurred before the project officially started or before the project phase they pertain to are considered prior period costs. Examples include drawing, quoting expenses, and related labor costs of designing engineers and quantity surveyors.

**2.1. Classification:**

- **Pre-Project Costs:** These should be recognized as part of the project costs if they are directly attributable to the project. They are often categorized under pre-production costs or preliminary expenses.

**2.2. Accounting Treatment:**

- **Capitalization of Costs:**
- **Pre-Project Costs:** Costs such as drawing, quoting, and designing labor should be capitalized if they are directly attributable to the project and are necessary to bring the project to its operational state. These costs should be added to the project’s total cost, enhancing the asset value of the project.

- **Accounting Entries:**
- **During the Project Setup:**
- **Debit:** Project Cost Account (for pre-project expenses)
- **Credit:** Accounts Payable/Cash

**2.3. Expense Recognition:**

- **For Costs Not Capitalizable:**
- **General Expenses:** If any portion of these costs cannot be capitalized, it should be expensed in the period in which it is incurred. This is less common for costs directly attributable to project execution.

**3. Detailed Explanation of Accounting Treatment:**

**3.1. **Recording Project Maintenance Costs:**

- When you incur maintenance costs after project completion, these are usually recorded under project-specific accounts if they relate to contractually obligated maintenance. They might be capitalized if they extend the life or increase the value of the project.
- **Capitalized Cost:** For ongoing or contractually required maintenance, create a separate sub-account within the project cost to record these expenses.

**3.2. **Prior Period Project Costs:**

- **Pre-Project Costs:** Include all such costs as part of the project’s capital costs. These should be included in the asset value of the project and amortized over the useful life of the project if applicable.

**In Summary:**

1. **Maintenance Costs:**
- If related to a warranty or contract, capitalize as part of project costs.
- Record expenses against the project cost account during the maintenance period.

2. **Prior Period Costs:**
- Costs like drawing, quoting, and design labor should be capitalized and included in the project cost.
- Ensure these costs are recorded in project accounts to accurately reflect the total project cost.

**Consultation:**
For precise treatment and to comply with accounting standards and tax regulations, consulting with a professional accountant or financial advisor is advisable. They can provide guidance tailored to your specific situation and ensure accurate financial reporting and compliance.