Introduction to Accounting For Construction Contracts

Accounting for construction contracts mainly includes treatment in respect of contract revenue, contract costs, trade receivables, gross amount due to / from customers, advances from customers and retention money.

Contract Revenue

Contract Revenue recognized in the income statements includes:

• Amount of revenue initially agreed in the contract
• Incentive Payments considered likely to accrue to the contractor
• Approved variations in contract revenue
• Amount of claims that are considered likely to be accepted by the customer

Revenue in respect of construction contracts is recognized according to stage of completion in respect of contracts whose outcome is reliably measured.

Contract Costs

All attributable costs of a contract must be recognized as construction costs. Other costs that cannot be reasonably attributed to contract activity shall be charged as general and administration expense in the accounting period they are incurred. Contract costs consist of the following:

• Direct or Specific Costs of the construction contract. Examples of direct costs include:
  • Direct material consumed on a specific project
  • Direct labor allocated to a particular contract (e.g. project in charge, site engineers, etc)
  • Insurance cost specifically incurred on a construction contract
  • Depreciation of machinery and equipment used on a specific contract
  • Allocation of the cost of central technical assistance department based on for example number of hours spent by technical staff on various contracts
  • Insurance cost allocation in respect of machinery used on multiple sites
  • Construction overheads
  • Allocation of salary of staff employed on multiple contracts (e.g. project supervisors)

  Contract Costs are recognized according to the method of stage of completion used. Contract costs incurred but not recognized in income statement are included in the Gross Amount Due from Customers as explained below.

  Trade Receivables

  Trade Receivables are calculated by finding the difference between amount billed to the customer for as progress billings and the amount of progress payments received from the customer.

  Trade Receivables are therefore calculated as follows:

  Trade Receivables = Amount Billed to Customer as progress billings – Progress Payments Received

  Note that according to the Accruals Concept, any advance outstanding from customer in respect of contractual work to be performed at a future date is not included as trade receivables.

  Gross Amount Due to / From Customers

  Gross Amount Due from Customer represents the amount of revenue earned on a contract but yet billed to the customer (if any billed amount is outstanding, it is included in trade receivables as explained above). It also includes the amount of contract costs incurred to date that have not yet been charged to the income statement. It therefore represents the contract work in progress (inventory).

  Gross Amount Due from Customer is calculated as follows:

  Contract Costs Incurred