Loss-making construction contracts

When a fixed-price contract's costs rise above its price, the contractor must recognise the whole expected loss as soon as it becomes apparent, not spread it over the rest of the project. This guide shows how IFRS 15 and IAS 37 combine to do that, explains which costs count since the 2022 amendment, and covers the US GAAP rule.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Loss-making construction contracts are accounted for in two parts. IFRS 15 recognises revenue and costs as work progresses, which captures the loss on work already done. For the loss on work still to do, IFRS 15 has no rules, so contractors apply IAS 37: when the unavoidable costs of fulfilling a contract exceed the economic benefits expected from it, the contract is onerous and the remaining expected loss is provided for at once. In this guide's example, a contract expected to lose 0.6 million recognises the whole loss in year 1: 0.24 million through progress and a provision of 0.36 million.

At a glance

Loss on work done
Through IFRS 15 progress
Loss on work to do
IAS 37 onerous provision
Recognised
As soon as the loss is expected
Costs of fulfilling
Incremental plus directly related
Before providing
Test related assets for impairment
US GAAP
ASC 605-35 loss provision
Loss-making construction contractsLoss on work done: Through IFRS 15 progress; Loss on work to do: IAS 37 onerous provision; Recognised: As soon as the loss is expected; Costs of fulfilling: Incremental plus directly related; Before providing: Test related assets for impairment; US GAAP: ASC 605-35 loss provision.KEY FACTS AT A GLANCELoss-making construction contractsLoss on work doneThrough IFRS 15 progressLoss on work to doIAS 37 onerous provisionRecognisedAs soon as the loss isexpectedCosts of fulfillingIncremental plus directlyrelatedBefore providingTest related assets forimpairmentUS GAAPASC 605-35 loss provisionTax BakersLoss-making construction contractsLoss on work done: Through IFRS 15 progress; Loss on work to do: IAS 37 onerous provision; Recognised: As soon as the loss is expected; Costs of fulfilling: Incremental plus directly related; Before providing: Test related assets for impairment; US GAAP: ASC 605-35 loss provision.KEY FACTS AT A GLANCELoss-making construction contractsLoss on work doneThrough IFRS 15 progressLoss on work to doIAS 37 onerous provisionRecognisedAs soon as the loss is expectedCosts of fulfillingIncremental plus directly relatedBefore providingTest related assets for impairmentUS GAAPASC 605-35 loss provisionTax Bakers
Key facts at a glance, as set out in this guide.

Loss-making construction contracts: an example

A contractor agreed to build a bridge for a fixed price of CU 10 million. Steel prices have risen, and it now expects total costs of 10.6 million: 9.8 million of incremental costs, such as materials, subcontractors and site labour, and 0.8 million of other costs directly related to the contract, such as depreciation of its cranes used on site. Costs incurred to date are 4.24 million.

How the expected loss is recognised in year 1 (CU million)How the expected loss is recognised in year 1 (CU million)0Loss onwork done+0Provision forwork to do1Total lossnow
The whole expected loss is recognised at once.
CU millionAmount
Progress: 4.24 / 10.640%
Revenue recognised: 40% x 104.00
Costs incurred(4.24)
Loss on work done(0.24)
Onerous provision for work to do: remaining costs 6.36 less remaining revenue 6.00(0.36)
Total loss recognised this year(0.60)

The whole expected loss of 0.6 million is recognised now. As the remaining work is done, the provision is used: each year's costs exceed the revenue recognised, and the provision release offsets the difference, so later years show no further loss unless estimates worsen again.

Which costs count as costs of fulfilling a contract?

Since the 2022 amendment to IAS 37, the costs of fulfilling a contract include both the incremental costs, such as direct labour and materials, and an allocation of other costs that relate directly to fulfilling contracts, such as depreciation of equipment used on the contract and site management. General and administrative costs are excluded unless explicitly chargeable to the client. Including the allocated costs makes more contracts onerous than an incremental-only view would.

What if exiting the contract is cheaper?

The unavoidable cost is the lower of the cost of fulfilling the contract and any compensation or penalty from failing to fulfil it. Where a contractor could terminate by paying a fixed penalty smaller than the expected loss, the provision is limited to that penalty, though in practice contractors rarely have such a right.

What is tested before the provision?

Assets dedicated to the contract, such as capitalised mobilisation costs or contract assets, are tested for impairment first, and the onerous provision covers only the loss that remains. Capitalised contract costs are impaired when their carrying amount exceeds the remaining consideration less the costs still to be incurred.

At what level is the test applied?

Contract by contract, after combining contracts that were negotiated as a package. A profitable contract with the same client cannot offset a loss-making one unless the two are combined under IFRS 15.

What do contractors disclose about loss-making contracts?

The onerous contract provisions and their movements, the main estimates behind them, and, where significant, the contracts or portfolios concerned. Large losses on a few contracts often explain a contractor's results, so readers look for them.

How does US GAAP treat loss contracts?

US GAAP kept specific guidance in ASC 605-35: when a construction contract is expected to make a loss, the whole loss is provided for in the period it becomes evident, with similar results. See IAS 37 onerous contracts, the cost-to-cost method and construction accounting.

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Questions people ask

How are loss-making construction contracts accounted for?

The loss on work done is recognised through IFRS 15 progress, and the remaining expected loss is provided for at once as an onerous contract under IAS 37.

Which costs are included in an onerous contract test?

Since 2022, incremental costs plus an allocation of other costs directly related to fulfilling the contract, such as depreciation of equipment used on it.

When is the loss on a construction contract recognised?

As soon as it becomes expected, not spread over the remaining work.

How does US GAAP treat loss-making construction contracts?

ASC 605-35 requires the whole expected loss to be provided for when it becomes evident.

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
  2. IFRS Foundation: IAS 37 Provisions, Contingent Liabilities and Contingent Assets

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.

IAS 37Onerous contractsConstructionThe cost-to-cost method of measuring progressConstructionConstruction accounting: the key IFRS issues

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