Variations and claims

Few construction contracts finish at the price they started with. Variations add work, claims seek payment for disruption, and both are often settled long after the work is done. This guide explains when variations and claims can be included in revenue, works through an unpriced change order, and covers disputed claims and how variations are folded into progress.

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

Short answer

Construction variations and claims change what a contractor will be paid. Under IFRS 15, a variation is a contract modification once the client approves the change in scope, even if the price is not yet agreed, and the expected price is estimated as variable consideration, subject to the constraint. Claims for extra payment, such as for client-caused delays, are recognised only to the extent it is highly probable that including them will not lead to a significant reversal of revenue. In this guide's example, an approved variation the contractor values at 1.3 million is included at 1.1 million.

At a glance

Variation
Contract modification once approved
Unpriced
Estimate the price, apply the constraint
Claims
Only if reversal highly unlikely
Usually
Part of the existing performance obligation
Accounting
Cumulative catch-up
Disputes
Often constrained to nil
Variations and claimsVariation: Contract modification once approved; Unpriced: Estimate the price, apply the constraint; Claims: Only if reversal highly unlikely; Usually: Part of the existing performance obligation; Accounting: Cumulative catch-up; Disputes: Often constrained to nil.KEY FACTS AT A GLANCEVariations and claimsVariationContract modificationonce approvedUnpricedEstimate the price, applythe constraintClaimsOnly if reversal highlyunlikelyUsuallyPart of the existingperformance obligationAccountingCumulative catch-upDisputesOften constrained to nilTax BakersVariations and claimsVariation: Contract modification once approved; Unpriced: Estimate the price, apply the constraint; Claims: Only if reversal highly unlikely; Usually: Part of the existing performance obligation; Accounting: Cumulative catch-up; Disputes: Often constrained to nil.KEY FACTS AT A GLANCEVariations and claimsVariationContract modification once approvedUnpricedEstimate the price, apply the constraintClaimsOnly if reversal highly unlikelyUsuallyPart of the existing performance obligationAccountingCumulative catch-upDisputesOften constrained to nilTax Bakers
Key facts at a glance, as set out in this guide.

Construction variations and claims: when are they included in revenue?

Can the variation or claim be included?Can the variation or claim be included?Has the client approved thechange or is there an enforceable right?NoCosts only:price not includedYesIs it highly probable no significantreversal will occur for the amount?NoInclude only theamount that isYesInclude the estimated amount
Approval opens the door; the constraint decides how much.

An unpriced variation: an example

A contractor is building a CU 10 million hospital wing with expected costs of 8 million. During the year, the client instructs it in writing to add a plant room, costing 1.0 million. The contractor will submit a price of 1.3 million; on similar variations it has historically recovered between 80% and 95% of what it asks, and the client has accepted the need for the work. At the year end, costs incurred are 4.0 million.

CU millionAmount
Original price10.0
Variation, constrained to the amount highly probable not to reverse1.1
Revised transaction price11.1
Revised expected costs: 8 + 19.0
Progress: 4 / 944.4%
Cumulative revenue4.933

Because the plant room is integrated into the same building, it is not a distinct service, so the variation is accounted for as part of the existing contract: the price and costs are updated and the effect on revenue to date is caught up at once. If the client later agrees 1.3 million, the extra 0.2 million is added to the price then.

What counts as approval?

Written instructions, signed change orders or the client's conduct can create enforceable rights. The contractor considers the contract terms, the law, and its history with the client. Work done on a variation the client has not approved, in the hope of recovering the cost later, is not a modification: its costs go into the estimate, but its price does not.

How are claims treated?

A claim, for example for the cost of a three-month delay caused by late design information from the client, is variable consideration if the contractor has an enforceable right to it. It is included only to the extent it is highly probable that a significant reversal will not occur. Disputed claims going to adjudication or arbitration are often constrained to nil, or to the amount a client has accepted, until they are resolved. Contractors that recognise large claims before settlement are a frequent focus of auditors and regulators.

How do variations affect the cost estimate?

The cost of an instructed variation goes into the estimate of total costs at once, even if its price has not been agreed. If only part of the price can be included under the constraint, the contract's margin falls temporarily, and in extreme cases the contract can become loss-making until the price is settled. Omissions, where the client removes work, reduce both the price and the expected costs, and the margin on the removed work is lost.

What if the variation is distinct?

If the variation adds work that is distinct, such as a separate car park priced at its standalone selling price, it is a separate contract. If it is distinct but not at standalone price, the remaining work is treated as a new contract with the old one terminated. Most construction variations are not distinct.

What do contractors disclose?

The judgements in estimating variable consideration, and the amounts recognised for unagreed variations and claims, which readers watch closely. See variable consideration, the cost-to-cost method and construction accounting.

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Questions people ask

How are construction variations accounted for under IFRS 15?

As contract modifications once the client approves the change in scope, with any unagreed price estimated as variable consideration subject to the constraint.

Can unpriced change orders be included in revenue?

Yes, if the scope change is approved; the expected price is estimated and constrained to the amount highly probable not to reverse.

When are construction claims recognised?

Only to the extent it is highly probable that including them will not lead to a significant reversal of revenue.

Is a variation usually a separate contract?

No. Most variations are integrated into the same asset and accounted for as part of the existing contract with a cumulative catch-up.

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 15Variable consideration and the constraint under IFRS 15ConstructionThe 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.