Construction revenue over time

Almost every contractor recognises revenue over time, but the reason it qualifies, and what happens when estimates change, are worth understanding precisely. This guide applies the IFRS 15 criteria to typical construction arrangements and works through a two-year project with a cost overrun, showing the cumulative catch-up and the contract balances it creates.

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

Short answer

Construction revenue recognition over time under IFRS 15 applies when the client controls the asset as it is built, typically because the contractor builds on the client's land, or when the asset has no alternative use to the contractor and the contract gives an enforceable right to payment for work done to date. Revenue is then recognised as progress is made, and when estimates change, the effect on revenue to date is caught up in the current period. In this guide's example, a 10 million contract shows profit of 0.75 million in year 1 and 0.375 million in year 2 after its cost estimate rises.

At a glance

Client's land
Client controls work in progress
Contractor's premises
No alternative use + right to payment
Usually
One performance obligation
Progress
Measured each period
Estimate changes
Cumulative catch-up
Billing gap
Contract asset or liability
Construction revenue over timeClient's land: Client controls work in progress; Contractor's premises: No alternative use + right to payment; Usually: One performance obligation; Progress: Measured each period; Estimate changes: Cumulative catch-up; Billing gap: Contract asset or liability.KEY FACTS AT A GLANCEConstruction revenue over timeClient's landClient controls work inprogressContractor's premisesNo alternative use +right to paymentUsuallyOne performanceobligationProgressMeasured each periodEstimate changesCumulative catch-upBilling gapContract asset orliabilityTax BakersConstruction revenue over timeClient's land: Client controls work in progress; Contractor's premises: No alternative use + right to payment; Usually: One performance obligation; Progress: Measured each period; Estimate changes: Cumulative catch-up; Billing gap: Contract asset or liability.KEY FACTS AT A GLANCEConstruction revenue over timeClient's landClient controls work in progressContractor's premisesNo alternative use + right to paymentUsuallyOne performance obligationProgressMeasured each periodEstimate changesCumulative catch-upBilling gapContract asset or liabilityTax Bakers
Key facts at a glance, as set out in this guide.

When does construction revenue recognition happen over time?

IFRS 15 recognises revenue over time if any one of three criteria is met. In construction, two of them matter:

  • The client controls the asset as it is created. A building or road on the client's land becomes the client's as it is built, so work in progress is the client's asset. Most construction meets this test.
  • No alternative use and a right to payment. When the contractor builds on its own premises, such as a ship or a specialised machine, revenue is over time only if the asset cannot readily be directed to another customer, by contract or in practice, and the contract gives an enforceable right to be paid for work done to date, including a reasonable margin, if the client terminates for reasons other than the contractor's failure.

If neither applies, revenue is recognised at completion, when control passes. See over time vs point in time.

A two-year construction contract example

Progress here is measured by the cost-to-cost method. A contractor agrees to build a warehouse on the client's land for CU 10 million, expecting costs of 8 million. In year 1 it incurs 3 million. In year 2, ground problems raise the expected total cost to 8.5 million, and costs to date reach 6.375 million.

CU millionYear 1Year 2
Costs to date / expected total costs3 / 8 = 37.5%6.375 / 8.5 = 75%
Cumulative revenue: 10 x progress3.757.50
Revenue for the year3.753.75
Costs for the year3.003.375
Profit for the year0.750.375
Revenue and profit by year (CU million)Revenue and profit by year (CU million)41Year 140Year 2RevenueProfit
The cost overrun is caught up in year 2's profit.

The project's expected margin falls from 2 million to 1.5 million. By the end of year 2, 75% of that, 1.125 million, should have been recognised; year 1 already recognised 0.75 million, so year 2 shows only 0.375 million. The whole effect of the change on work done to date lands in year 2, the cumulative catch-up; nothing is restated.

What contract balances arise?

The client is billed on certified valuations: 3 million in year 1 and a cumulative 8 million by the end of year 2. At the end of year 1, revenue of 3.75 million exceeds billings, a contract asset of 0.75 million. At the end of year 2, billings of 8 million exceed revenue of 7.50 million, a contract liability of 0.50 million.

What if progress cannot yet be measured reliably?

Early in a project, a contractor may not be able to estimate the outcome reasonably, for example before design is complete. If it still expects to recover its costs, it recognises revenue only to the extent of costs incurred, with no margin, until it can measure progress. Once it can, it switches to the normal method and catches up the margin earned to date.

Is a construction contract one performance obligation?

Usually. Design, materials, labour and equipment are inputs to one combined output, the finished asset, and the contractor provides a significant service of integrating them. Separate obligations arise where the contract includes distinct items that are not integrated, such as a long-term maintenance service after completion.

Can progress be measured another way?

Yes. Output methods, such as surveys of work performed or units completed, are allowed if they faithfully depict the transfer of control. Milestones are suitable only if the work between them is not significant, otherwise they leave work in progress the client already controls out of revenue. The method is applied consistently to similar contracts. See construction accounting, and for developers selling units off plan, property development revenue.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

When is construction revenue recognised over time?

When the client controls the asset as it is built, typically on the client's land, or when the asset has no alternative use and the contractor has an enforceable right to payment for work done.

What is a cumulative catch-up adjustment?

Recognising in the current period the full effect of a change in estimates on revenue for work done to date, without restating earlier periods.

Is a construction contract usually one performance obligation?

Yes, because the contractor integrates design, materials and labour into a single asset.

Can milestones be used to measure progress?

Only if they faithfully depict performance, which means the work between milestones is not significant.

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.

IFRS 15Revenue over time or at a point in time under IFRS 15ConstructionConstruction accounting: the key IFRS issuesIFRS 15Identifying performance obligations under IFRS 15

More in Construction

Next in this topicThe cost-to-cost method of measuring progressTopicAll 13 guides in Construction

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