Contract assets and liabilities in construction

A contractor's balance sheet often carries large contract assets and liabilities, and their movements tell readers a lot about billing discipline and cash. This guide explains what each balance means, works through a portfolio of three contracts, and covers advance payments, credit losses and the remaining performance obligations disclosure that shows the order book.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Contract balances in construction arise because revenue, billing and cash rarely move together. Under IFRS 15, when a contractor has recognised more revenue than it has billed, it has a contract asset, a right to consideration conditional on further work; when it has billed or been paid more than it has earned, it has a contract liability. Once billed and due, an amount is a receivable. Balances are netted within each contract but not across contracts, so a contractor usually shows both contract assets and contract liabilities. In this guide's example, three contracts give a contract asset of 0.6 million and contract liabilities of 1.7 million.

At a glance

Contract asset
Revenue earned but not yet billable
Receivable
Billed and unconditional
Contract liability
Billed or paid ahead of revenue
Netting
Within a contract, not across
Advances
Contract liabilities
Backlog
Remaining performance obligations
Contract assets and liabilities in constructionContract asset: Revenue earned but not yet billable; Receivable: Billed and unconditional; Contract liability: Billed or paid ahead of revenue; Netting: Within a contract, not across; Advances: Contract liabilities; Backlog: Remaining performance obligations.KEY FACTS AT A GLANCEContract assets and liabilities in constructionContract assetRevenue earned but notyet billableReceivableBilled and unconditionalContract liabilityBilled or paid ahead ofrevenueNettingWithin a contract, notacrossAdvancesContract liabilitiesBacklogRemaining performanceobligationsTax BakersContract assets and liabilities in constructionContract asset: Revenue earned but not yet billable; Receivable: Billed and unconditional; Contract liability: Billed or paid ahead of revenue; Netting: Within a contract, not across; Advances: Contract liabilities; Backlog: Remaining performance obligations.KEY FACTS AT A GLANCEContract assets and liabilities inconstructionContract assetRevenue earned but not yet billableReceivableBilled and unconditionalContract liabilityBilled or paid ahead of revenueNettingWithin a contract, not acrossAdvancesContract liabilitiesBacklogRemaining performance obligationsTax Bakers
Key facts at a glance, as set out in this guide.

Contract assets and liabilities: three contracts

Balances for three contracts (CU million)Balances for three contracts (CU million)RevenueBilledBalanceContract A5.04.4Asset 0.6Contract B3.03.5Liability 0.5Contract C0.82.0Liability 1.2
Each contract is netted on its own.
CU millionRevenue to dateBilled to dateBilled but unpaidBalance
Contract A5.04.41.0Contract asset 0.6
Contract B3.03.50.0Contract liability 0.5
Contract C0.82.00.0Contract liability 1.2

The balance sheet shows contract assets of 0.6, from contract A, contract liabilities of 0.5 + 1.2 = 1.7, from contracts B and C, and trade receivables of 1.0 for contract A's unpaid invoices. Contract A's asset is not netted against B's or C's liabilities, because each contract is assessed on its own. Contract C's liability comes from an advance payment of 2.0 received at the start, of which 0.8 has been earned.

When does a contract asset become a receivable?

When the right to consideration becomes unconditional, meaning only the passage of time is required before payment is due. In construction, that is typically when work is certified and invoiced. Unbilled work, and retentions still subject to conditions, stay as contract assets. See construction retentions.

How are advance payments treated?

As contract liabilities, released to revenue as the work is done. Large advances paid well before the related work may contain a significant financing component, in which case the contractor recognises interest expense and higher revenue, unless the advance's purpose is something other than financing, such as securing the contractor's commitment or funding materials ordered at the start.

Are contract assets tested for credit losses?

Yes. Contract assets and receivables are within the IFRS 9 impairment rules, usually measured with lifetime expected credit losses under the simplified approach. A contract asset can also be reduced for reasons other than credit, such as a dispute over the work, which is a change in the transaction price instead. See ECL on contract assets.

What must contractors disclose?

  • Opening and closing contract assets, contract liabilities and receivables, and significant changes in them.
  • Revenue recognised in the year that was in contract liabilities at the start of the year.
  • The remaining performance obligations: the transaction price allocated to work not yet done, and when it is expected to be recognised. This is the order book, or backlog, in IFRS terms.

Are contract balances current or non-current?

Usually current. IAS 1 allows assets and liabilities to be classified by the entity's operating cycle, and for a contractor that cycle is the time it takes to complete its contracts, often longer than a year. Contractors that use the operating cycle disclose amounts expected to be settled after more than twelve months.

How do US contractors describe these balances?

Many US contractors still use the older terms: costs and estimated earnings in excess of billings, often called underbillings, for contract assets, and billings in excess of costs and estimated earnings, overbillings, for contract liabilities. The amounts follow ASC 606 in the same way as IFRS 15.

How should readers interpret these balances?

Rising contract assets relative to revenue can signal that work is outpacing billing, which may reflect slow certification, disputes or optimistic progress estimates. Rising contract liabilities usually mean strong advance payments and good cash flow. Comparing the backlog with annual revenue shows how many years of work are secured, and at what margin if the contractor discloses it. See construction revenue over time and construction accounting.

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Questions people ask

What is a contract asset in construction?

A contractor's right to consideration for work done that is conditional on something other than the passage of time, such as further work or certification.

What is a contract liability?

Amounts billed or received from the client before the related work has been done, such as advance payments.

Can contract assets and liabilities be netted?

Only within the same contract; they are not offset across different contracts.

What is the remaining performance obligations disclosure?

The transaction price allocated to work not yet done and when it is expected to be recognised, effectively the order book.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

ConstructionRetentions and the financing componentConstructionConstruction revenue over timeConstructionConstruction accounting: the key IFRS issues

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This guide is general information. It is not tax or legal advice for your situation.