Subcontracting outsources manufacturing steps to external suppliers. Freespace tracks raw materials issued to subcontractors, goods received back, and stock at supplier centers — linked to purchase orders, BOMs, and production transactions.
Priced on Raw Material Quantity — when the subcontractor is paid on the raw material given (for example, ₹/kg of copra), handle it with a Production Voucher plus an Expense.
Setup
1. Create a subcontracted item
Create the finished item with Is Subcontracted enabled. Optionally set a default service item for the subcontracting charge.
CREATE NEW SUBCONTRACTING ITEM
2. Create BOM for the subcontracted item
Set the Bill Of Materials in Production so raw materials issued to the subcontractor auto-populate based on the subcontracted item and quantity.
CREATE NEW BOM FOR SUBCONTRACTING ITEM
3. Create a supplier center (optional)
Create a center with type Supplier Center to track stock held at the subcontractor's location.
Workflow
| **Step** | **Document** | **What happens** |
|----------|--------------|------------------|
| 1 | Purchase Order | Select order type Subcontracted to issue raw materials and receive finished goods. |
| 2 | Approved PO actions | Issue raw materials and receive subcontracted items from the approved order. |
| 3 | Issue For Subcontracting | Send raw materials to the subcontractor. |
| 4 | Receipt From Subcontracting | Receive processed goods back into stock. |
PURCHASE ORDEROPTIONS IN APPROVED PURCHASE ORDER
All issue-for-subcontracting and receipt-from-subcontracting transactions are also available from the Production module left navigation.
Use Cases
Common ways businesses use subcontracting in Freespace:
| **Use case** | **How to handle it** |
|--------------|----------------------|
| Outsource a process step (e.g. dyeing fabric, plating parts, polishing) | Standard flow: subcontracted item + BOM → Purchase Order with order type Subcontracting → Issue → Receipt → Purchase Invoice. |
| Convert raw material into a new finished good (e.g. yarn → cloth, grain → flour) | Same standard flow; the finished good's BOM lists the raw materials the subcontractor consumes. |
| Send several raw materials, get one finished good | Add all inputs to the item's BOM; they are issued together and consumed on receipt against the same finished good. |
| Receive in batches over time | Post multiple Receipt From Subcontracting documents against one PO until the ordered quantity is met. |
| Track material physically held at the vendor | Create a Supplier Center so issued material shows as stock at the subcontractor until consumed. |
| Charge based on the finished goods delivered (e.g. ₹/piece produced) | Standard flow — the service price on the PO is charged per finished good received. |
| Charge based on the raw material given (e.g. ₹/kg of copra milled) | Use a Production Voucher plus an Expense — see Priced on Raw Material Quantity. |
| Vendor also supplies some of the material | Buy that material on a normal purchase first (so it is in stock), then include it in the BOM/issue like any other input. |
How Costing Works
The cost of a subcontracted finished good is built up on Receipt From Subcontracting, at the moment you approve the receipt. It has two parts:
Finished good cost = raw material cost consumed + subcontracting service charge
1. Raw material cost
Raw materials are valued from stock at the supplier center using the weighted average cost of that item (the value at which it was issued to the subcontractor).
Only the raw materials listed under Inventory Inputs (Consumed) on the receipt are costed, matched to the finished good they belong to.
The total consumed value for a finished good is spread evenly across the quantity of that finished good received on the receipt.
2. Subcontracting service charge
The service charge comes from the service line on the Purchase Order (the pre-tax amount per unit of the finished good).
It is applied as a per-unit add-on to every unit of that finished good received. So a partial receipt only picks up a proportional share of the charge.
If several PO lines point at the same finished good, their per-unit amounts are added together.
The two parts combine into the unit cost that finished stock carries into your destination center:
Finished unit cost = (consumed raw material value ÷ received finished quantity) + PO service charge per unit
Accounting Entries
Two documents complete the accounting: the receipt capitalizes the cost into stock and accrues the vendor charge; the purchase invoice turns that accrual into a payable.
On Receipt From Subcontracting (approve)
| **Account** | **Debit** | **Credit** |
|-------------|-----------|------------|
| Inventories — finished good received | Full finished value (raw + service) | |
| Inventories — raw materials consumed | | Consumed raw material value |
| Accrued Inventory Assets | | Service charge portion |
The raw material simply reclassifies from the raw item into the finished item within Inventories; the extra service value is parked in Accrued Inventory Assets until the vendor is billed.
Total = raw material ₹10,000 + service ₹4,000 = ₹14,000 Shirt unit cost = ₹14,000 ÷ 100 = ₹140 / shirt
On receipt approval, Inventories rises by ₹4,000 net (fabric reclassified to shirts plus the service value), and Accrued Inventory Assets is credited ₹4,000. When you create the Purchase Invoice from the receipt, ₹4,000 moves from Accrued Inventory Assets to the subcontractor payable (plus any tax).
What must I configure before subcontracting?
A subcontracted item with BOM, optionally a supplier center, and a Purchase Order with order type Subcontracted.
Where do I issue and receive subcontracted materials?
From the approved Purchase Order actions, or via Issue For Subcontracting and Receipt From Subcontracting in Production.
How is stock at the subcontractor tracked?
Create a Supplier Center and use the Subcontracting Inventory Summary report.
What if the subcontractor is paid on the raw material given, not the finished goods?
Use a Production Voucher with the charge as an overhead, then an Expense to the vendor — see Priced on Raw Material Quantity.
How is the cost of the subcontracted finished good calculated?
On Receipt From Subcontracting approval: consumed raw material value + subcontracting service charge, divided across the finished quantity received. See How Costing Works.
Where does the service charge come from?
From the service line on the Purchase Order — the pre-tax amount per unit of the finished good. It is added to every unit received, so partial receipts pick up a proportional share.
At what value are raw materials consumed?
At the weighted-average cost of that item at the supplier center — the value at which it was issued to the subcontractor. Freespace does not use a separate FIFO/LIFO layer here.
When is the subcontractor charge actually posted as a cost?
The charge is capitalized into the finished goods on receipt (parked in Accrued Inventory Assets), then becomes a supplier payable when you raise the Purchase Invoice from the receipt. It reaches the profit and loss account only when the finished goods are sold.
Do I create the Purchase Invoice from the PO or the receipt?
From the approved subcontracting Purchase Order, choose Create Invoice and select the approved receipts. The invoice bills the service based on the finished goods actually received.
Can one Purchase Order produce more than one finished good?
Yes. Add a line per finished good on the PO; each is issued, received, and costed against its own BOM.
Can I receive more or less than the ordered quantity?
You can post multiple receipts until the ordered quantity is met. Yield differences between issued material and finished output are reflected in the finished good's unit cost.
What happens if I issue material but scrap or lose some at the vendor?
Consume only what actually went into the finished goods on the receipt. Remaining material stays as stock at the supplier center and can be returned or adjusted separately.
How do I see what is lying with the subcontractor?
Use the Subcontracting Inventory Summary report, which shows issued, consumed, and produced quantities per item for a Purchase Order.
Why must the source center differ from the supplier center?
Issue moves material from your center to the subcontractor's center, so the two must be different centers.
Why is the supplier center rejected on receipt?
The source center on a receipt must be a center marked as a Supplier Center. Set the center type on the center master.
How do I record GST/tax on the subcontractor's bill?
Tax is handled on the Purchase Invoice created from the receipts, using the purchase tax on the service line. The finished goods cost carries the pre-tax service value; input tax is claimed separately.
Can I cancel a receipt after invoicing?
Cancel the Purchase Invoice first, then the Receipt From Subcontracting. Cancelling reverses the inventory and accrual entries.
OPTIONS IN APPROVED PURCHASE ORDER
All issue-for-subcontracting and receipt-from-subcontracting transactions are also available from the Production module left navigation.