"This cannot be done, since they are CB, therefore cannot expense, so how would this be reported?"

But they have expensed it, from the perspective of Costs. Labor and materials, overhead, etc. What you are asking is, "Can they write off lost Profit?" The answer is, you cannot write off what you never wrote on.

A CB entity would have the gross income as AR.

The write off would clear the AR, and offset the income, the same as you see on the tax form = Allowances, refunds and/or discounts (contra-income). Because that's what this became.

And AR is essentially a Revolving current asset clearing account. So, they already have everything that would be needed.