Where policy decides the profit
A contract priced before costs were known, varied halfway through and spanning two year-ends can be made to show almost any result. Which is exactly why the rules are strict and the auditors are close.
Contracting is the sector where accounting policy most directly determines reported profit. A contract spanning two financial years, priced before costs were known and varied halfway through, can be made to show almost any result — which is precisely why the recognition rules are strict and why contractors are audited closely.
The mechanics that matter
- Revenue over time. Under IFRS 15, construction revenue is typically recognised over time where the criteria are met, measured by progress — usually a cost-based input method. The measure of progress is the profit figure, and it must be applied consistently.
- Variations and claims. Variable consideration is only included to the extent it is highly probable that a significant reversal will not occur. Optimistic recognition of unapproved variations is the most common source of contractor restatements.
- Contract assets and liabilities. Work done and unbilled sits as a contract asset; billing ahead of work as a contract liability. Together they are the truest picture of where a contractor stands.
- Retentions. Amounts held by the employer are receivables, discounted where the timing is long — and are frequently the difference between a contractor's reported profit and its cash position.
- Onerous contracts. Where a contract is loss-making, the expected loss is recognised in full immediately, not spread across remaining progress.
- Subcontractor liabilities. Accrued for work performed, whether or not the subcontractor has invoiced.
Contractors fail with profitable order books more often than with unprofitable ones. Retentions held for years, certification delays, unapproved variations recognised as revenue but never paid, and subcontractors paid faster than the employer pays produce a business that is profitable on paper and insolvent in practice. The rolling cash forecast matters more here than in almost any other sector.
Where the underlying issue is contractual — a disputed variation, a claim under a FIDIC form, a bond call, decennial liability — that is legal territory and sits with Neo Legal's construction practice. We quantify; they contend.
Reviewed 18 August 2026 by Ahmed Nabil Selim. UAE tax rates, thresholds and deadlines change — confirm the position for your period before relying on it.
Construction — frequently asked questions
Where the over-time criteria are met — commonly because the contractor's performance creates or enhances an asset the customer controls as work proceeds, or creates an asset with no alternative use combined with an enforceable right to payment for work completed to date — revenue is recognised progressively by reference to a measure of progress. Most UAE contractors use a cost-based input method: costs incurred to date as a proportion of total expected costs. Where the criteria are not met, revenue is recognised at a point in time on completion.
Only to the extent it is highly probable that including it will not result in a significant revenue reversal when the uncertainty resolves. That is a deliberately demanding threshold. An instructed variation being priced is very different from a contested claim the employer disputes, and the two should not be treated alike. Contractors who recognise contested claims in full and reverse them a year later damage their credibility with auditors, lenders and buyers well beyond the amount involved.
As receivables, recognised as part of the contract consideration, and presented separately from ordinary trade receivables because their recovery profile is different. Where release is expected significantly later, the time value of money may need to be reflected, and where recovery is doubtful an expected credit loss allowance applies. Contractors should track retentions by contract with expected release dates — it is one of the most commonly neglected balances and is often material relative to reported profit.
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