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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Measuring the profits (particular trades): Private Finance Initiative (PFI): contract accounting: bid costs

In some sectors of industry, including the PFI, significant costs are incurred in bidding for contracts. Urgent issue task force abstract 34 ‘Pre-contract costs’ sets out the circumstances in which these costs are immediately charged as an expense to the profit and loss account, or capitalised as an asset and charged as an expense over the term of the contract.

Bid expenses incurred before the award of a contract is virtually certain should be charged to the profit and loss account as the expense is incurred and should not subsequently be reinstated as an asset.

Once the award of a contract is virtually certain, directly attributable bid costs that can be identified and reliably measured should be capitalised as an asset and charged as an expense over the period of the contract.

The point at which the award of a contract becomes virtually certain will depend on the particular facts in each case. It is essential that the private sector operator has been appointed sole preferred bidder, though this, by itself, may not be sufficient. In addition:

  • award of the contract should be expected within a reasonable timescale,
  • contractual arrangements should be sufficiently advanced to provide evidence that the pre-contract costs will be recovered from income received from the contract, and
  • award of the contract should not be subject to some uncertain future event that is not wholly within the control of the parties, e.g. a requirement for regulatory approval from a third party.

HMRC officers should refer any questions concerning what constitutes generally accepted accounting practice to their local compliance/advisory accountant.