IAS 11- Construction Contracts

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IAS 11- Construction Contracts

IAS 11 — Construction Contracts prescribed the percentage-of-completion method for recognising revenue and costs on fixed-price and cost-plus contracts until IFRS 15 superseded it globally from 1 January 2018, and Ind AS 115 replaced Ind AS 11 in India from 1 April 2018. The standard is operationally relevant in FY 2026-27: legacy EPC contracts reference its mechanics, the cost-to-cost input method lives on inside Ind AS 115, and the rule that any foreseeable loss must be recognised in full — immediately — has not changed. This guide explains how IAS 11 worked, what shifted under Ind AS 115, and the practical differences that affect Indian EPC, infrastructure and real estate finance teams today.

Why IAS 11 Still Demands Your Attention in FY 2026-27

Even though Ind AS 115 formally displaced Ind AS 11 for eligible Indian companies from 1 April 2018 (under the Companies (Indian Accounting Standards) Rules 2015, as amended), treating IAS 11 as a closed chapter creates real risk.

Legacy contracts and arbitration. EPC and infrastructure agreements signed before April 2018 often contain accounting policy clauses that reference Ind AS 11 mechanics. When a contract dispute reaches arbitration — sometimes three to five years after execution — the original revenue recognition policy determines how billings, claims, and retentions are characterised. Understanding IAS 11 is therefore a dispute-management skill, not just an accounting history lesson.

Auditor benchmarking. Regulators and auditors compare the stage-of-completion workings in your Ind AS 115 disclosure against the cost-to-cost logic that IAS 11 established. Unexplained deviations — particularly where your computed stage of completion exceeds what an independent engineer would certify — trigger adjustments and adverse observations.

Subsidiaries in jurisdictions still transitioning. If your group has project companies in certain South Asian, African or Middle Eastern jurisdictions that have not yet fully adopted IFRS 15, IAS 11 may still be the live standard at subsidiary level and must be reconciled during consolidation.

The expected-loss rule has not changed. This is the single most important continuity: recognise the full expected loss on a loss-making contract the moment total estimated costs exceed total estimated revenue. The rule moved from IAS 11 into IAS 37 / Ind AS 37 (read alongside IFRS 15 / Ind AS 115), but the discipline is identical. Getting it wrong materially misstates P&L and can trigger a qualified audit opinion.

Scope: Which Contracts IAS 11 Covered

IAS 11 applied to contracts specifically negotiated for the construction of a single asset or a combination of closely interrelated assets. Two types were recognised:

• Fixed-price contracts: The contractor agrees to a fixed contract price — sometimes with escalation clauses for key inputs such as steel or cement — and bears cost-overrun risk.
• Cost-plus contracts: The contractor is reimbursed for allowable or otherwise-defined costs plus a percentage fee or fixed margin. Cost risk sits largely with the customer.

A contract covering multiple assets was treated as a single contract if the assets were designed, built, and governed as an integrated project. Conversely, where a contract contained separately priced, distinct modules — for example, a power plant EPC broken into a civil works package, a mechanical package, and a grid-connection package — each module could be segmented and accounted for independently, provided the segmentation criteria were met.

This logic maps directly onto Step 2 of the Ind AS 115 five-step model: identifying performance obligations. The practical exercise of deciding whether a multi-deliverable EPC contract contains one performance obligation or several distinct ones traces its intellectual roots to IAS 11's grouping and segmentation rules.

The Percentage-of-Completion Method: Mechanics

IAS 11 required revenue and costs to be recognised in proportion to the stage of completion of a contract at each balance sheet date, provided four conditions were satisfied:

1. Total contract revenue could be reliably measured
2. It was probable that economic benefits would flow to the entity
3. Both the costs to complete and the stage of completion could be reliably measured
4. Contract costs attributable to the project could be clearly identified and tracked

Where these conditions were not met — typical in the early mobilisation phase of a complex contract — revenue was recognised only to the extent of costs incurred that were probable of recovery, with zero profit recognised until reliable estimation was achievable.

Measuring Stage of Completion

Three measurement approaches were accepted:

1. Cost-to-cost method: Costs incurred to date divided by total estimated contract costs. This is the input method carried forward into Ind AS 115 (paragraph 41) and remains the dominant approach in Indian EPC and infrastructure.
2. Surveys of work performed: Independent engineer certifications of physical work completed. Used on large civil infrastructure projects where certified progress invoices are issued monthly.
3. Physical proportion: Physical units completed as a share of total contract units — kilometres of road laid, megawatts commissioned, floors of a building completed.

The cost-to-cost method is operationally convenient but carries a well-documented distortion risk: abnormal costs from inefficiency, rework, or poor planning inflate the numerator without representing genuine progress on the contract. Both IAS 11 and Ind AS 115 paragraph 41(c) explicitly require that wasted costs be excluded from the stage-of-completion calculation. This is a compliance point that auditors check with increasing frequency.

Contract Revenue and Contract Costs: What Goes In and What Stays Out

Contract Revenue

Under IAS 11, contract revenue included:

• The initial agreed contract amount
• Variations — additional scope approved by the customer where it was probable the variation would result in revenue and the amount could be reliably measured
• Claims — amounts sought from the customer for costs not contemplated in the original contract (e.g., unforeseen ground conditions, employer delays), recognised only when it was probable the customer would accept them and the amount could be reliably measured
• Incentive payments — bonuses for early completion or quality milestones, recognised when it was sufficiently certain the performance criteria would be achieved

The critical test was probability and reliable measurement — a test that gave contractors meaningful discretion, and in many cases meaningful room for optimism.

Contract Costs

Allowable contract costs included:

• Direct costs: Labour, materials, subcontractor charges, depreciation of plant specifically deployed on the contract
• Allocable costs: Insurance, design and technical assistance, construction overheads capable of systematic allocation to contracts
• Specifically chargeable costs: Reimbursable expenses agreed with the customer, such as travel for distant site surveys

Excluded: general selling and administrative overheads not chargeable to the contract, R&D expenditure, depreciation of idle plant not deployed on the specific project, and borrowing costs (unless capitalised under the entity's IAS 23 policy for qualifying assets).

Expected Losses and Onerous Contracts: The Immediate Write-Off Rule

When total expected contract costs exceeded total expected contract revenue, making a contract onerous, IAS 11 required the entire expected loss to be recognised immediately as an expense — regardless of how early in the project the recognition fell and regardless of the stage of completion already achieved.

There is no smoothing here. There is no rationale for spreading the loss over the remaining contract life. The loss is known, it is foreseeable, and it must hit P&L in the period in which it is identified.

Under the current framework, Ind AS 37 provides the mechanism for onerous contract provisions on contracts within Ind AS 115's scope. The 2022 amendments to IAS 37 (mirrored in the revised Ind AS 37) clarified that the cost of fulfilling an onerous contract must include all costs directly related to the contract — not merely incremental costs but also an allocated share of other costs that relate directly to contract fulfilment. This prevents companies from understating onerous contract exposure by applying a narrow incremental-cost-only interpretation.

Worked Example: A Rs. 120 Crore EPC Road Contract Across Three Financial Years

Contract details:

• Contract value: Rs. 120 crore (fixed price, no escalation clause)
• Estimated total costs at inception: Rs. 96 crore
• Expected profit: Rs. 24 crore (20% margin)
• Duration: FY 2024-25 through FY 2026-27

Year 1 — FY 2024-25: Smooth Execution

Year 2 — FY 2025-26: Cost Overrun Emerges

A soil contamination discovery requires unforeseen remediation. Revised total estimated costs rise to Rs. 112 crore.

Year 2 P&L absorbs a Rs. 2.40 crore reversal — the profit earned in Year 1 is partially clawed back through a higher cost-recognition rate. This is the self-correcting mechanism of the input method at work.

Year 3 — FY 2026-27: Contract Becomes Onerous

A further steel price spike and subcontractor insolvency push revised total costs to Rs. 130 crore, which exceeds the Rs. 120 crore contract value.

Expected loss: Rs. 130 crore − Rs. 120 crore = Rs. 10 crore

Under Ind AS 37 read with Ind AS 115, the entire Rs. 10 crore expected loss is recognised immediately in FY 2026-27 P&L as an onerous contract provision — not spread across the remaining contract life. Additionally, since cumulative profit of Rs. 4.80 crore has already been recognised across Years 1 and 2, the Year 3 P&L must fully absorb the swing from that cumulative profit position to the total expected loss.

This kind of crystallisation — a large one-quarter loss — is precisely what surprises markets and triggers promoter queries and audit scrutiny. The only antidote is rigorous, project-manager-signed quarterly cost-to-complete estimation reviewed by the CFO before accounts are closed.

IAS 11 vs IFRS 15 and Ind AS 115: What Changed and What Did Not

The biggest practical difference for Indian contractors is the variable consideration constraint, examined next.

Variable Consideration: The Biggest Practical Shift for Indian EPC

Under Ind AS 11, a contractor recognised a claim or performance bonus as revenue if it was "probable" that the customer would accept it and the amount was "reliably measurable." In practice, this created space for optimistic recognition — particularly where claims were live in negotiation but had not been formally agreed.

Under Ind AS 115, paragraphs 50-58, variable consideration — which encompasses liquidated damages (as revenue reductions), performance bonuses, escalation recoveries, change orders, and claims — must be:

1. Estimated using either the expected value method (probability-weighted across scenarios) or the most likely amount method (single most likely outcome), and
2. Constrained: included in the transaction price only to the extent it is highly probable that a significant reversal of cumulative revenue recognised will not occur when the uncertainty resolves.

Practical illustration

Your EPC contract includes a completion bonus of Rs. 6 crore payable if the project is handed over 60 days ahead of schedule. You estimate a 55% probability of achieving this milestone.

• Expected value: Rs. 6 crore × 55% = Rs. 3.30 crore
• Constraint test: Is it highly probable that recognising Rs. 3.30 crore will not result in a significant reversal? At 55% probability, most auditors and standard-setters would answer no. The constrained variable consideration is Rs. 0 until the probability materially increases — say, when the project is 30 days ahead with 45 days remaining.

Similarly, liquidated damages (LDs) — which contractually reduce revenue — must be estimated and deducted from the transaction price even before the customer formally levies them, if there is a genuine risk of delay. Contractors who delay recognising LDs until the customer raises a formal claim are mis-applying Ind AS 115.

This constraint is why Ind AS 115 typically shows lower contract revenue in early stages compared with old Ind AS 11 treatment. It is not conservatism — it is precision in the face of genuine uncertainty, and it prevents the boom-bust P&L swings that plagued the sector under the older standard.

Real Estate Developers: A Separate but Parallel Journey Under Ind AS 115

Indian real estate developers faced a distinct transition. Before Ind AS 115, the ICAI Guidance Note on Accounting for Real Estate Transactions (Revised 2012) permitted percentage-of-completion recognition once 25% of construction was complete, 25% of the sale consideration was received, and costs were reliably estimable. This was an industry-specific carve-out.

Under Ind AS 115, real estate revenue recognition depends on whether the developer transfers control over time or at a point in time. For most under-construction residential projects, over-time recognition is supported because:

1. The developer is constructing a unit that has no alternative use to it — the unit is sold to a specific buyer under an agreement enforceable before completion — and
2. The developer has an enforceable right to payment for performance completed to date — which, under RERA-registered agreements, is typically satisfied because payment schedules are linked to construction milestones and buyers cannot unilaterally cancel without compensation

Where both conditions are met, revenue is recognised over time using the cost-to-cost input method — functionally similar to old percentage-of-completion, but with tighter controls on variable consideration (escalation clauses, deferred payment discounts) and an obligation to assess whether a significant financing component exists where payment is received substantially in advance of construction.

For commercial real estate held for lease, revenue from the lease itself falls under Ind AS 116, not Ind AS 115. Finance teams should ensure lease income and construction-phase revenue are mapped to the correct standard in the chart of accounts.

Common Mistakes Finance Teams Make — and How to Fix Them

Mistake 1: Including wasted and rework costs in the stage-of-completion numerator. Costs incurred through inefficiency do not represent genuine contract progress. Ind AS 115 para 41(c) is explicit. Fix: Create a dedicated wasted-cost account code in your project accounting system and exclude it programmatically from the cost-to-complete ratio. Reconcile this exclusion in your workings file every quarter.

Mistake 2: Delaying recognition of expected losses in hopes the situation recovers. The rule is unambiguous — the full expected loss must be recognised the moment total estimated costs are expected to exceed total contract revenue. Fix: Mandate quarterly cost-to-complete sign-offs by the project manager, countersigned by the finance head, before any balance sheet date is closed. Build this into your financial close checklist.

Mistake 3: Recognising variable consideration without applying the constraint. Claims, change orders, and bonuses are included in revenue because the commercial team says they are "probable." Fix: Establish a written variable consideration policy specifying the evidence standard and approval authority for each category of variable revenue. Audit the policy at each half-year close.

Mistake 4: Treating all contract modifications as new contracts. When a customer issues a change order, it is a new contract only if the additional scope is distinct and the incremental price reflects standalone selling price. Most change orders in EPC modify the existing contract and require a cumulative catch-up revenue adjustment. Fix: Maintain a contract modification log and assess each change order against the Ind AS 115 para 18-21 criteria before the quarter closes.

Mistake 5: Conflating contract assets with trade receivables. A contract asset (unbilled revenue where the right to bill has not yet been triggered by a milestone) is different from a trade receivable (the unconditional right to payment that exists after a milestone is achieved). Fix: Separate the two in your general ledger with distinct account codes and confirm the classification in every quarter-end balance sheet review. Ind AS 115 para 105-107 governs this distinction.

Disclosure Requirements: IAS 11 Then and Ind AS 115 Now

IAS 11 required entities to disclose:

• Amount of contract revenue recognised in the reporting period
• Methods used to determine contract revenue and stage of completion
• Aggregate costs incurred and recognised profits (net of recognised losses) to date on contracts in progress
• Advances received from customers
• Retentions withheld by customers
• Gross amount due from customers for contract work (a balance sheet asset) and gross amount due to customers (a balance sheet liability)

Ind AS 115 (paragraphs 110-129) expands this substantially. The minimum required disclosures for a listed Indian EPC company in FY 2026-27 include:

• Disaggregation of revenue by geography, contract type, contract duration, or other categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows
• Contract asset and contract liability roll-forward, with explanation of significant changes during the period (e.g., revenue recognised from opening contract liabilities, transfers from contract assets to receivables)
• Remaining performance obligations — the aggregate transaction price allocated to unsatisfied obligations at period-end, plus the expected recognition timeline. This is sometimes called the "backlog disclosure" and investors treat it as a leading indicator of revenue visibility
• Significant judgements around over-time versus point-in-time recognition, and the input or output method chosen for measuring progress
• Assets recognised for contract costs — capitalised bid costs, mobilisation costs — with the amortisation policy and any impairment recognised

For listed Indian companies, SEBI's LODR Regulations and the Integrated Filing System require segment-level revenue disclosures that must be aligned with these Ind AS 115 categories. A mismatch between segment revenue in the earnings release and the disaggregated revenue disclosure in the annual report is a common audit committee finding.

Key Takeaways

• IAS 11 is superseded but not irrelevant: Its cost-to-cost mechanics live on in Ind AS 115's input method, legacy contracts reference its principles in disputes, and its expected-loss discipline is embedded in Ind AS 37.
• The onerous contract rule is non-negotiable and immediate: Recognise the full expected loss the moment total estimated costs exceed total contract revenue — there is no basis for deferral, regardless of stage of completion, and the 2022 Ind AS 37 amendments widened the cost base that must be included.
• Variable consideration under Ind AS 115 requires a constraint test: Claims, bonuses, escalation amounts, and LDs must clear the "highly probable of no significant reversal" bar — not merely the "probable and reliably measurable" bar of old Ind AS 11 — which typically suppresses early-stage revenue recognition.
• Exclude wasted and rework costs from your stage-of-completion numerator: Including inefficiency costs as if they represent contract progress is a misapplication of both the old standard and Ind AS 115 para 41(c), and it is a common audit finding.
• Contract modifications need structured evaluation at every period-end: Each change order must be assessed as a new contract or a modification of the existing contract — getting this wrong creates cumulative catch-up adjustments that distort period revenue and earnings per share.
• Real estate developers must confirm over-time recognition criteria project by project: The no-alternative-use test and the enforceable-right-to-payment test under Ind AS 115 must be re-evaluated for each project at each year-end, particularly where RERA registration or agreement terms have changed.
• Ind AS 115 disclosures are substantially heavier than IAS 11 required: Contract asset and liability roll-forwards, remaining performance obligation tables, and disaggregated revenue are minimum statutory requirements — not optional disclosures — and regulators are actively reviewing them for completeness and consistency with management commentary.