Job Work and Subcontracting in Manufacturing: An ERP Guide

Job work and subcontracting in manufacturing are everywhere in India. A Ludhiana bicycle parts maker sends components for electroplating, a Tiruppur garment exporter sends fabric for dyeing and stitching, a Pune auto component supplier sends castings for heat treatment, and a Surat textile trader sends grey cloth for processing. Each time, the principal's material sits at someone else's premises, comes back transformed (with some loss), and the job worker bills for the service. When this is tracked in registers and WhatsApp messages, stock goes missing on paper, process losses are never questioned, product costs omit the job work charges, and GST paperwork becomes a year-end scramble. This guide explains how to manage job work properly: the material flow, stock tracking, process loss control, costing, GST documentation basics, reconciliation and how to set it up in an ERP.

What job work means

Job work is treatment or processing undertaken by one person on goods belonging to another. The owner of the goods is the principal; the processor is the job worker. Ownership of the material stays with the principal throughout. Common job work processes include machining, heat treatment, plating, powder coating, painting, dyeing, printing, stitching, embroidery, assembly, packing and testing.

Subcontracting is often used loosely for the same thing. In ERP terms, the distinction that matters is whether you send your own material (job work, also called material-supplied subcontracting) or the subcontractor buys the material and sells you finished parts (a normal purchase).

The job work material flow

1. Job work order: the principal issues an order to the job worker specifying the process, quantity, rate and expected return date.
2. Material dispatch: material leaves the principal's stock under a delivery challan, moving to a "with job worker" location in the books.
3. Processing: the job worker processes the material, with some normal loss or scrap.
4. Return of processed goods: processed goods come back with the job worker's challan; the principal records receipt and, if applicable, quality inspection.
5. Return of scrap and unused material: or a documented decision on its disposal.
6. Job work bill: the job worker invoices for the service charges, with GST.
7. Reconciliation: material sent vs processed goods received plus scrap plus loss plus balance at job worker.

Tracking stock at job workers

The most common failure is treating material sent for job work as consumed, or simply forgetting it. Stock at job workers is still your inventory and must appear in your stock and balance sheet. The clean way is to treat each job worker as a stock location:

Location	Item	Qty	Value (₹)
Main store	Raw casting C-210	2,400	4,32,000
Job worker: Heat treatment unit	Raw casting C-210	800	1,44,000
Job worker: Plating unit	Machined part M-210	500	1,57,500

This makes material at job workers visible in stock reports, valuation and MRP. Planning that ignores stock at job workers either over-orders or assumes material is available in the main store when it is not.

Process loss and yield: the number to watch

Every process has some loss: weight loss in machining, rejects in plating, shrinkage in dyeing, cutting waste in stitching. Agree a standard loss percentage per process with each job worker and track actuals.

Worked example

Suppose a hypothetical Rajkot engineering firm sends 1,000 kg of steel bars for forging. The agreed norms are 3 percent scale (burning) loss and 3 percent flash, which the job worker must return as scrap. So 940 kg of forgings are expected.

Item	Qty (kg)
Material sent	1,000
Forgings received	905
Flash scrap returned	30
Scale loss (balancing figure)	65
Scale loss allowed by norm (3%)	30
Excess loss	35

Actual yield is 90.5 percent against a 94 percent norm. At ₹68 per kg, the excess 35 kg is worth ₹2,380 on this one order. If the firm sends 10 tonnes a month and the same excess persists, it loses about ₹23,800 a month. Without a reconciliation per job work order, this leakage never surfaces, because the forgings simply arrive "a bit short".

Actions: agree norms in writing, reconcile each order, recover excess loss through debit notes where agreements allow, and compare loss across job workers doing the same process.

Costing job work correctly

Job work charges are part of the cost of conversion and belong in product cost and inventory valuation. The cost of a processed part is:

Material cost (including normal loss) + Job work charges + Freight to and from job worker + Inspection cost

Example

• Steel for one forging: 2.0 kg finished weight, 6 percent normal loss, so 2.128 kg input at ₹68 = ₹144.68.
• Forging charges: ₹18 per kg of finished weight = ₹36.00.
• Freight both ways, allocated: ₹4.50.
• Cost of forging = ₹185.18, before your own machining.

If actual loss is 9.5 percent, input material per forging rises to 2.21 kg (₹150.28), increasing cost by about ₹5.60 per piece. On 5,000 pieces a month, that is around ₹28,000 a month. Our guide to product costing in manufacturing covers how this fits into the full cost sheet.

GST documentation basics for job work

GST law has specific provisions for sending goods to job workers without payment of tax, subject to conditions. Detailed compliance belongs with your tax adviser, but operationally an ERP should support:

• Delivery challans for goods sent to job workers, with the details GST rules require.
• Time limits for return: inputs are generally required to be brought back (or supplied from the job worker's premises as permitted) within one year, and capital goods within three years; otherwise the dispatch is treated as a supply on the date it was sent. Track ageing of material at job workers against these limits.
• Periodic reporting of goods sent to and received from job workers in the prescribed return (Form ITC-04), with frequency depending on turnover. Check the current requirement for your registration.
• E-way bills for movement where applicable.
• Job worker's invoice for services, on which the principal claims input tax credit.

Rates and conditions change, so treat the above as a checklist of what to track and confirm specifics with your CA.

Setting up job work in an ERP

1. Create each job worker as a vendor and as a stock location (or a subcontracting location linked to the vendor).
2. Define the process in the BOM or routing as an outsourced operation, with the job worker, rate and standard loss.
3. Create job work (subcontracting) orders from production planning or manually.
4. Issue material via challan, moving stock from your store to the job worker location.
5. Receive processed goods against the order, consuming material from the job worker location and adding processed stock to your store.
6. Record scrap returned and process loss.
7. Match the job worker's bill against received quantity and agreed rate.
8. Run reconciliation reports per job worker and per order, and ageing for GST time limits.

Fininvo's manufacturing module lists subcontracting alongside BOMs, work orders, routing and production cost tracking, and its inventory module covers multi-location stock and transfers.

Reconciliation routine

Frequency	Check
Per order	Material sent = processed received + scrap + normal loss + balance; excess loss flagged
Monthly	Stock at each job worker confirmed with the job worker's statement
Quarterly	Physical verification at major job workers
Ongoing	Ageing of material at job workers vs GST return time limits
Before returns	Job work data reconciled with challans for GST reporting

When you are the job worker

Many SMEs do job work for larger principals. The reverse discipline applies:

• Track principal's material separately; it is not your inventory and must not appear in your stock valuation.
• Record receipts and returns per principal and order.
• Track your own consumables and labour per job to know whether job rates are profitable.
• Document process loss and scrap returned, so disputes with the principal are settled on data.

Common job work mistakes

• Material sent recorded as consumption, so stock and costs are both wrong.
• No agreed loss norms, leaving excess loss unchallenged.
• Job work charges booked as overheads instead of product cost.
• Material lying at job workers for over a year without notice, creating GST exposure.
• Scrap belonging to the principal sold by the job worker with no accounting.
• Job worker bills paid without matching received quantity.

Frequently Asked Questions

Is material at a job worker part of my inventory?

Yes. Ownership remains with the principal, so it must be included in stock and valuation. Treat each job worker as a stock location to keep it visible.

How should process loss at job workers be controlled?

Agree standard loss percentages per process in writing, reconcile each job work order, compare actual loss across job workers, and recover excess loss where agreements allow.

Are job work charges part of product cost?

Yes. They are part of the cost of conversion and should be included in product costing and inventory valuation, along with freight to and from the job worker.

What happens if goods are not returned from the job worker in time?

Under GST rules, if inputs or capital goods are not returned within the prescribed periods, the original dispatch is treated as a supply and tax becomes payable. Track ageing and confirm current rules with your tax adviser.

Can an ERP handle job work for multiple processes in sequence?

Many ERPs support routing with outsourced operations, so material can move from one job worker to another or come back between processes. Confirm that stock moves through each location correctly in a demo.

How Fininvo Helps

Fininvo combines subcontracting, work orders, multi-location inventory, purchasing and accounting, so material sent, received and billed stays linked. Explore manufacturing, purchasing and pricing.