IPSAS 11: Construction Contracts

When a government builds a road, a bridge or a hospital through a contractor, the work may take two or three years. If the contractor, or the government unit doing the work for another body, recorded nothing until the building was handed over, its accounts would show no income for years and then a large sum at the end, and the statements in between would be misleading.

International Public Sector Accounting Standard (IPSAS) 11, Construction Contracts, sets out how to share the revenue and the cost of a long contract between the years in which the work is done. It uses the percentage of completion method: revenue and cost are recognised in proportion to the work completed at the year end.

This topic covers the definitions; the kinds of contract; what counts as contract revenue and contract cost, and what does not; when the outcome can be estimated reliably; how stage of completion is measured; the treatment of expected deficits and advances; disclosure; the journal entries; and the position of the standard now that it has been replaced by IPSAS 47. The next topic covers IPSAS 12 on inventories.

IPSAS 11 was tested in May Diet, 2026, Question 2 (20 marks), where part (a) (4 marks) asked for four costs that cannot be attributed to a contract and part (b) (8 marks) asked for the conditions for reliable estimation for three types of contract. November Diet, 2023, Question 3 (20 marks) included the journal entries for a contract in part (b) (4 marks). Read the Public Procurement Act 2007 first.

Definitions

• Construction contract: a contract or similar binding arrangement specifically negotiated for the construction of an asset or a combination of assets closely interrelated in design, technology, function or purpose. Examples are refineries, airports, dams, railway tracks, roads, bridges, pipelines, tunnels, ships, water supply systems and power plants.
• Contractor: an entity that performs construction work under such a contract.
• Cost-plus (cost-based) contract: the contractor is reimbursed for allowable or defined costs, plus a percentage of those costs or a fixed fee.
• Fixed price contract: the contractor agrees a fixed contract price, or a fixed rate per unit of output, sometimes subject to cost escalation clauses.
• Unit price contract: based on estimated quantities of items and their unit prices; the final price depends on quantities, as in excavation work.
• Time and material contract: used where the scope is unclear; an agreed hourly or daily rate plus expenses, with costs classed as direct, indirect, mark-up and overhead, sometimes with a cap.
• Retentions: amounts of progress billings not paid until conditions in the contract are met or defects are put right.
• Progress billings (valuation certificates): amounts billed for work performed, whether or not paid; they show the original contract amount, changes, amounts paid, percentage completed, payment due and the balance remaining.
• Amount due from customers: costs incurred plus recognised surpluses, less recognised deficits and progress billings, where costs plus surpluses exceed billings.

Contract revenue and contract cost

Revenue comprises the initial amount agreed in the contract, and variations, claims and incentive payments to the extent that it is probable that they will result in revenue and they can be measured reliably.

Costs comprise:

• costs that relate directly to the contract
• costs attributable to contract activity in general that can be allocated to the contract on a systematic and rational basis
• other costs specifically chargeable to the customer under the contract

Costs excluded because they cannot be attributed or allocated are:

• general administration costs for which reimbursement is not specified in the contract
• selling costs
• research and development for which reimbursement is not specified
• depreciation of idle plant and equipment not used on the contract

Recognition: stage of completion

When the outcome of a contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion at the reporting date (the percentage of completion method), which matches revenue with the costs incurred to reach that stage and so reports revenue, expenses and surplus or deficit for the proportion of work done.

When can the outcome be estimated reliably?

• Fixed price contract, all of: total contract revenue can be measured reliably; it is probable that economic benefits or service potential will flow to the entity; both the costs to complete and the stage of completion at the reporting date can be measured reliably; and the costs attributable to the contract can be clearly identified and measured so that actual costs can be compared with earlier estimates.
• Cost-plus (cost-based) contract, both of: it is probable that economic benefits or service potential will flow to the entity; and the costs attributable to the contract, whether or not separately reimbursed, can be clearly identified and measured reliably.
• Percentage of completion method applies where these conditions are met: revenue is matched with the costs incurred in reaching the stage of completion, so that revenue, expenses and surplus or deficit are reported for the proportion of work done.

Measuring the stage of completion

Any of:

• the proportion of contract costs incurred for work done to date to the estimated total contract costs
• surveys of work performed (the valuation certificate)
• completion of a physical proportion of the work

Example (costs method). Contract price ₦480m; costs incurred to date ₦260m; estimated total costs ₦400m. Stage of completion 260 ÷ 400 = 65%; revenue recognised 480 × 65% = ₦312m; costs recognised ₦260m; surplus to date ₦52m.

When the outcome cannot be estimated reliably

Revenue is recognised only to the extent of contract costs incurred that are probably recoverable, and costs are expensed in the period incurred. No surplus is recognised until the outcome can be estimated.

Expected deficits and advances

• Expected deficit. Where the contract is meant to recover its costs fully and it is probable that total costs will exceed total revenue, the expected deficit is recognised as an expense immediately, whatever the stage of completion. Example: price ₦300m, expected total cost ₦340m, so a ₦40m deficit is expected. If the contract is 50% complete, revenue is ₦150m and costs ₦170m, a deficit of ₦20m is in the statement of financial performance already, so a further ₦20m is charged at once to bring the total to ₦40m.
• Advances. received for work not yet done are a liability until the work is performed.
  If ₦60m is received and work against ₦45m is done, the liability is 60 − 45 = ₦15m.

Disclosure and journal entries

Disclose: the contract revenue recognised in the period; the methods used to determine it; and the methods used to determine the stage of completion. For contracts in progress at the reporting date: the aggregate costs incurred and recognised surpluses (less deficits); the advances received; and the retentions. Present the gross amount due from customers as an asset and the gross amount due to customers as a liability.

Journals. (i) Recognise revenue by stage of completion: Dr Receivable, Cr Contract revenue. (ii) On receipt: Dr Bank, Cr Receivable. (iii) Recognise costs: Dr Contract expenses, Cr Payables. (iv) On payment: Dr Payables, Cr Bank. (v) On receipt of an advance: Dr Bank, Cr Payables (liability); as work is performed: Dr Payables, Cr Contract revenue.

Example. A government construction unit builds 60 classrooms at ₦8m each, a contract of 60 × 8 = ₦480m over two years, with no variation clause. At the end of year 1 the valuation certificate shows 65% executed. Costs incurred and paid are ₦280m and ₦250m has been received from the customer.

The receivable left is 312 − 250 = ₦62m and the surplus recognised is 312 − 280 = ₦32m.

IPSAS 11 and IPSAS 47

The International Public Sector Accounting Standards Board issued IPSAS 47, Revenue, in 2023. It replaces IPSAS 9 (revenue from exchange transactions), IPSAS 11 (construction contracts) and IPSAS 23 (revenue from non-exchange transactions) for periods beginning on or after 1 January 2026, with earlier application allowed. Under IPSAS 47, revenue from contracts with performance obligations is recognised as the obligations are satisfied, which in construction usually gives results close to the percentage of completion method.

IPSAS 11 remains the standard that examination questions apply, and it explains the logic that IPSAS 47 keeps for long contracts. A later topic covers IPSAS 47.

The ideas in more depth

Why recognise revenue before completion

The work is being done and value is being created each year. If revenue waited for completion, the first years would show costs and no revenue (a deficit) and the last year would show all the revenue (a large surplus). Neither shows the real performance. The percentage method spreads the result in line with the work.

Why an expected deficit is recognised at once

A known loss is not earned over time; it is already certain. Prudence requires that the whole loss be recognised as soon as it is expected, not spread across the remaining years. This also gives a warning to management and to users of the accounts.

Sources and references

• International Public Sector Accounting Standard 11, Construction Contracts; IPSAS 47, Revenue, which replaces it for periods beginning on or after 1 January 2026.

These points are stated as at 5 November 2026.

Worked examples

1. Stage.
   260 ÷ 400 = 65%.
2. Revenue.
   480 × 65% = ₦312m.

1. Total deficit.
   340 − 300 = ₦40m.
2. Already shown.
   150 − 170 = −₦20m.
3. Further charge.
   40 − 20 = ₦20m.

1. Balance.
   60 − 45 = ₦15m.

How to answer in the exam

• Decide first whether the outcome can be estimated reliably; state the conditions for the type of contract.
• Compute the stage from the data given (costs or valuation certificate) and apply it to the total contract price.
• Post the four journals in order, with narrations.
• Test for an expected deficit before finishing.

Common mistakes in the exam

• Applying the stage to cost instead of to the contract price for revenue.
• Including selling costs or idle plant depreciation in contract costs.
• Spreading an expected deficit over the remaining years.
• Treating advances as revenue when received.
• Recognising surplus when the outcome cannot be estimated reliably.
• Confusing progress billings with cash received.

Quick revision

• Revenue = stage of completion × contract price; stage by costs, survey or physical proportion.
• Exclusions: unreimbursed administration, selling costs, unreimbursed research, idle plant depreciation.
• Not reliable: revenue to the extent of recoverable cost; cost as incurred.
• Expected deficit at once; advances are a liability; IPSAS 47 replaces IPSAS 11 from 2026.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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