Key Impacts for Construction Contracts

The revised Section 23 in brief: a shift in emphasis

At a high level, revised Section 23 reframes revenue recognition around a simpler but more conceptually driven question: when, and to what extent, has the entity satisfied its performance obligations to transfer goods or services to the customer?

Key features of the revised approach include:

• A clearer focus on identifying what the entity has promised to deliver to the customer, rather than defaulting to “one contract, one revenue stream”.
• Greater emphasis on assessing whether revenue is recognised over time or at a point in time, based on control and performance, not just duration.
• More explicit requirements for variable consideration , including claims, incentives and penalties—features that are commonplace in construction arrangements.
• Enhanced disclosure expectations, aimed at helping users understand not just the numbers, but the judgments behind them.

For many construction businesses, none of these ideas are entirely new. What is new is the expectation that these principles are applied consistently and documented and evidenced clearly, rather than inferred implicitly through legacy policies.

Identifying what is actually being delivered

Construction contracts are often negotiated as a single commercial package: design, procurement, build, installation, and maintenance. Historically, many entities accounted for these arrangements as a single unit of account without extensive analysis of whether distinct components existed within the contract.

The amended Section 23 requires  entities to consider whether promises within a contract should be genuinely distinct; for example:

• Is the design phase capable of being delivered independently?
• Does a post construction maintenance obligation represent a separate service?
• Are optional variations clearly separable from the core build?

In practice, many construction businesses will conclude that contracts remain a single performance obligation. However, the act of performing the analysis, and documenting why obligations are or are not distinct, becomes more important under the revised standard.

Another area for further consideration is multiple contracts with the same customer, often contracted in phases. If these contracts are negotiated early on as a single commercial objective, or the phases become interdependent from a pricing or performance perspective, they may very well need to be combined and treated as a single contract.

This is less about creating complexity and more about aligning revenue recognition with how value is delivered to the customer.

Revenue over time: still the norm, but not automatic

Revenue recognised over time remains central to construction accounting. However, the amended guidance places greater emphasis on why revenue is recognised over time, rather than assuming this treatment purely because a contract spans multiple reporting periods.

In order to recognise revenue over time, entities need to demonstrate that the customer:

• Controls the asset as it is created or enhanced, or
• Receives and consumes the benefits of the work as it is performed, or
• The entity has no realistic alternative use for the asset and the entity has an enforceable right to payment for work completed to date.

These criteria may appear technical, but in practice they prompt important conversations. For example:

• Are there contractual clauses that restrict enforceable rights to payment?
• Do termination terms genuinely compensate for work performed?
• Does bespoke construction always equate to “no alternative use for the entity”, or are there circumstances where this assumption should be challenged?

For finance leaders, the message is clear: recognising revenue over time remains appropriate in many cases, but it should be supported by a refreshed assessment of contractual rights, not simply precedent.

Measuring progress: more judgement, not less

Cost to cost methods (input methods) remain common in construction. The revised standard does not prohibit them, but it does require entities to consider carefully whether the chosen method faithfully depicts performance.

This becomes particularly relevant where:

• Significant upfront procurement or mobilisation costs are incurred;
• Certain activities do not directly transfer value to the customer;
• Project inefficiencies or rework distorts cost profiles.

Under the amended Section 23, there is greater focus on excluding costs that do not reflect performance when measuring progress. For construction businesses, this may mean reassessing whether current cost bases genuinely provide a fair measure of work done, especially on complex or phased projects.

This is an area where professional judgement, grounded in an understanding of both the contract and operational realities, becomes critical. Where there is typically close alignment between the entity’s commercial team and the customer surveying team, output methods such as monthly surveys of work performed may be favoured, as the chosen method to be applied consistently and supported by appropriate documentation. 

Variable consideration: claims and variations under the spotlight

Few sectors rely on variable consideration as heavily as construction. Claims, acceleration payments, bonuses and penalties are part of daily commercial life. The revised Section 23 introduces and requires clearer discipline around  when such amounts can be recognised.

The core principle is prudence, but not paralysis. Variable consideration can be included in revenue only when it is highly probable that a significant reversal will not occur once uncertainty is resolved. This raises practical questions at inception and as estimation is updated at the end of each reporting period:

• What evidence supports the inclusion of a claim at a particular stage?
• How much reliance can be placed on past outcomes with the same counterparty?
• How should disputes, arbitration or adjudication affect recognition?

For finance heads, the challenge is balancing commercial optimism with technical rigour. Overly aggressive recognition exposes entities to prospective revision risk ; excessive conservatism may understate current performance and distort margins.

Contract modifications: clarity where complexity reigns

Variations are endemic in construction. The revised guidance encourages entities to consider whether a modification to a contract:

• Creates a new obligation, or
• Adjusts the scope or price of an existing one.

This distinction matters because it affects whether revenue is adjusted prospectively, retrospectively, or treated as a separate element altogether. In practice, contract modification accounting is rarely clear cut. The more important takeaway is that modifications should be assessed consistently and transparently, with accounting treatments aligned to the commercial substance of how scope and pricing change.

Capitalisation of contract-related costs

The Amendments introduce more prominence in relation to capitalising contract related costs, bringing FRS 102 closer to IFRS 15. This includes incremental costs of obtaining a contract (such as sales commissions) and certain costs to fulfil a contract that are not within the scope of another standard.

An accounting policy choice is now available for costs to obtain a contract—capitalisation or expensing— requiring  judgement around eligibility, amortisation period and consistency of application. For construction entities, this increases complexity and documentation requirements, with greater reliance on robust systems and controls.

Practical implications for finance leaders

Policies and documentation need refreshing—not reinventing

For many construction entities, existing revenue policies will broadly survive the amendments. However, they will likely need refinement rather than wholesale replacement.

Finance teams should expect to:

• Update accounting treatments for contracts as the 5-step model is applied.
• Revisit “standard” contract assumptions that may no longer hold universally.
• Update accounting policy wording to reflect  revised Section 23 terminology.
• Enhance documentation around judgements, particularly for contractual performance obligations, variable consideration and progress measurement.

Importantly, this is not just an accounting exercise. Input from commercial and operational teams is often essential to ensure judgements reflect how projects are genuinely delivered, particularly for complex multi-year ones. 

Systems, controls and forecasting deserve attention

Revenue recognition does not operate in isolation. Changes in how revenue is measured can affect:

• Project forecasts and margin analysis.
• Bank covenants and performance metrics.
• Bonus schemes and incentive arrangements.

Finance leaders should consider whether existing systems capture the data needed to support revised judgements, particularly around costs excluded from progress measures or the status of claims and variations. 

Strong controls and clear audit trails will be increasingly important as auditors and regulators focus on the application of the amended standard.

Communication matters—internally and externally

Perhaps the most underestimated impact of the amendments is the need for clear communication. Boards, Audit committees and lenders may see changes in revenue profiles without an obvious change in underlying performance.

Explaining why outcomes have shifted, grounded in amended accounting principles rather than operational deterioration, is a critical role for finance leadership.

Equally, transparent disclosures can help users of financial statements understand the judgements made and the uncertainties that remain.

An opportunity, not just a compliance exercise

For construction businesses, the amended Section 23 should not be viewed as a technical hurdle to clear once and forget. Instead, it offers an opportunity to align financial reporting more closely with how value is delivered on projects, and to strengthen confidence in the numbers being reported.

The entities that navigate this change most effectively will be those that treat revenue recognition as a cross functional discipline, not just an accounting policy file. As with most changes in financial reporting, the real challenge lies not in understanding the words of the standard, but in applying them thoughtfully to the realities of complex, evolving construction contracts.

Finance leaders who engage early, challenge assumptions, and document judgments clearly will be best placed to manage both the technical and commercial consequences of the amendments. Please do connect with us to assist you in both implementation of the standards but also seamless integration into your project and financial reporting.

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