IPSAS 11
Active
Construction Contracts
Prescribes the accounting for construction contract costs and revenue – including the percentage-of-completion method, contract cost inclusions/exclusions, the immediate-expected-deficit rule (limited to full-cost-recovery contracts), and the treatment of commercial versus non-commercial public-sector contracts. Effective 1 July 2002.
Active Standard
IPSAS 11 Construction Contracts is the current, active standard issued by the IPSASB for accounting for the costs and revenue of construction contracts. It is effective for annual financial statements covering periods beginning on or after 1 July 2002 (earlier application encouraged). The immediate-expected-deficit rule applies only to full-cost-recovery contracts.
IPSAS 11 is drawn primarily from IAS 11 Construction Contracts, adapted for the public sector with commentary on binding arrangements, cost-plus and non-commercial contracts, and an explicit scope covering contracts with no contract revenue. Unlike the private sector (where IAS 11 was replaced by IFRS 15), IPSAS 11 remains construction-contract-specific, pending IPSAS 47.
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Objective, Scope & Definitions (paras. 1–11)
Objective – public sector construction is different
Prescribes the accounting treatment of costs and revenue for construction contracts. In many jurisdictions, public sector construction contracts specify NO contract revenue at all – funding comes via appropriation or grant instead. There, the primary issue is allocating CONSTRUCTION COSTS to the right period. Where contracts ARE commercial or cost-recovery based, the issue extends to allocating REVENUE too.
Applied by a contractor preparing accrual-basis financial statements
Key definitions (para. 4)
Construction contract
A contract, or similar BINDING ARRANGEMENT, specifically negotiated for constructing an asset or a closely interrelated/interdependent combination of assets.
Fixed price contract
The contractor agrees to a fixed contract price or fixed rate per unit of output (possibly subject to cost-escalation clauses).
Cost plus / cost-based contract
The contractor is reimbursed for allowable/defined costs, plus (if commercial) an additional percentage or fixed fee.
"Binding arrangement" reaches beyond legal contracts – a ministerial direction, cabinet decision, Act of Parliament, or MOU between government departments counts too, provided it confers similar rights and obligations (para. 7).
Public-sector contract types (paras. 9–10)
COMMERCIAL COST-PLUS
Revenue covers costs PLUS a profit margin – a genuine commercial arrangement.
NONCOMMERCIAL FULL/PARTIAL COST RECOVERY
A public sector entity constructs for another entity in exchange for full or partial reimbursement – no profit margin.
Where a controlling entity funds a controlled entity's construction INDIRECTLY (general appropriation, or third-party grants with no direct cost recovery), that arrangement is classified as a FIXED PRICE contract for IPSAS 11 purposes (para. 10) – also covers services directly related to construction (project managers, architects) and demolition/environmental restoration work (para. 6).
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Combining & Segmenting Construction Contracts (paras. 12–15)
Segment ONE contract into several (para. 13) – ALL THREE conditions
Separate proposals submitted for each asset Each asset separately negotiated, and either party could accept/reject that part alone Costs and revenues of each asset can be identified
Combine SEVERAL contracts into one (para. 14) – ALL THREE conditions
Negotiated as a single package So closely interrelated they're effectively one project with an overall margin Performed concurrently or in continuous sequence
An OPTIONAL additional asset is a separate contract if it differs significantly in design/technology/function from the original, OR its price was negotiated independently of the original contract price (para. 15).
3
Contract Revenue (paras. 16–22)
What contract revenue comprises
Contract revenue = Initial agreed amount + Variations + Claims + Incentive payments (where probable AND reliably measurable)
Measured at the fair value of consideration received/receivable. For cost-plus contracts, the initial revenue amount may need to be ESTIMATED (e.g. by reference to expected life-of-contract costs) rather than being stated outright.
Three components requiring judgment
ComponentIncluded when...
VariationCustomer-instructed scope change; probable the customer approves it AND the revenue amount, and reliably measurable
ClaimAmount sought as reimbursement for costs outside the contract price (delays, spec errors); only when negotiations have reached an ADVANCED stage and the amount can be reliably measured
Incentive paymentExtra payment for meeting/exceeding performance standards; only when the contract is sufficiently advanced that meeting the standard is probable, and reliably measurable
Amounts paid directly to SUBCONTRACTORS by third-party funding agencies must be reviewed against the revenue definition/recognition criteria – if they qualify, they're both contract revenue AND contract costs (para. 22).
4
Contract Costs (paras. 23–29)
Three cost categories (para. 23)
Direct costs – site labor/supervision, materials, plant depreciation, moving/hiring plant, direct design/technical assistance, rectification/warranty costs, third-party claims (reduced by incidental revenue, e.g. surplus-material sales) Allocable general costs – insurance, non-direct design costs, construction overheads (incl. IPSAS 5 capitalized borrowing costs) – allocated systematically, based on NORMAL activity levels Contract-specific chargeable costs – general admin/development costs where the contract specifies reimbursement
Excluded from contract costs (para. 28)
General admin costs NOT specified for reimbursement Selling costs R&D costs not specified for reimbursement Depreciation of IDLE plant/equipment not used on the contract
Costs incurred to SECURE a contract can be included if separately identifiable, reliably measurable, and it's probable the contract will be won – but if expensed when incurred, they're NOT reinstated as contract costs if won later (para. 29).
5
Recognition – Percentage of Completion Method (paras. 30–43)
Reliable outcome – the conditions differ by contract type
FIXED PRICE CONTRACT (PARA. 31) – ALL FOUR
Total contract revenue can be measured reliably Probable that economic benefits/service potential will flow to the entity Both costs to complete AND stage of completion can be measured reliably Contract costs attributable can be clearly identified and measured, so actuals can be compared to estimates
COST PLUS / COST-BASED CONTRACT (PARA. 32) – BOTH
Probable that economic benefits/service potential will flow to the entity Attributable contract costs (reimbursable or not) can be clearly identified and measured reliably
Stage of completion methods (para. 38) & unreliable outcome (para. 40)
Contract costs incurred to date ÷ estimated total contract costs Surveys of work performed Physical proportion of contract work completed
Outcome NOT reliably estimable → Revenue recognized only to the extent of RECOVERABLE costs incurred; costs expensed as incurred; no surplus/deficit
Progress payments/advances often do NOT reflect actual work performed – don't use as a completion proxy (para. 38). Materials delivered but not yet installed, and advance subcontractor payments, are EXCLUDED from costs-incurred-to-date (para. 39).
6
Recognition of Expected Deficits (paras. 44–48)
The immediate-loss rule – but ONLY for full-cost-recovery contracts
Where a contract is intended, AT INCEPTION, to have costs FULLY RECOVERED from the other parties to the contract, and it becomes probable that total contract costs will exceed total contract revenue, the ENTIRE expected deficit is recognized as an expense IMMEDIATELY – not spread over the remaining contract life.
Scope limitation: this rule does NOT apply to contracts intended for less-than-full cost recovery, where the funding gap is expected to be filled by appropriation or third-party grants (para. 46) – in those, an "expected deficit" isn't the same red flag. The deficit amount is determined regardless of whether work has started, the stage of completion, or expected surpluses on OTHER unrelated commercial contracts (para. 48).
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Changes in Estimates & Disclosure (paras. 49–56)
Changes in estimates (para. 49)
The percentage-of-completion method is applied CUMULATIVELY each period to CURRENT estimates. A change in estimated contract revenue, costs, or outcome is a change in accounting ESTIMATE (IPSAS 3) – applied to the current and future periods, never retrospectively restated.
Required disclosures (paras. 50–55)
Contract revenue recognized as revenue in the period Methods used to determine recognized contract revenue Methods used to determine stage of completion
FOR CONTRACTS IN PROGRESS AT THE REPORTING DATE
Aggregate costs incurred and recognized surpluses (less deficits) to date Amount of advances received; amount of retentions Gross amount DUE FROM customers (an asset) / DUE TO customers (a liability) for contract work
Retentions = progress billings withheld until specified conditions/defect-rectification are met. Advances = revenue received before the related work is performed (para. 52).
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Worked Example – Noncommercial Aid-Funded Contract (IG9–IG14)
Aid agency funds construction; costs revised upward in Year 1
Initial contract revenue 4,000; initial cost estimate – by end of Year 1, revised to 8,050 total; stage of completion 26% (Yr1), 74% (Yr2), 100% (Yr3)
Stage of completion is measured as costs-incurred-to-date ÷ latest total estimated costs.
Year 1: Revenue = 4,000 × 26% = 1,040; Expenses = 8,050 × 26% = 2,093.
Year 2: Cumulative revenue = 4,100 × 74% = 3,034 (less 1,040 recognized in Yr1 = 1,994 recognized this year); cumulative expenses = 8,200 × 74% = 6,068 (less 2,093 = 3,975 this year).
Year 3: Cumulative revenue = 4,100 × 100% = 4,100 (less 3,034 = 1,066 this year); cumulative expenses = 8,200 (less 6,068 = 2,132 this year).
Year 2: Cumulative revenue = 4,100 × 74% = 3,034 (less 1,040 recognized in Yr1 = 1,994 recognized this year); cumulative expenses = 8,200 × 74% = 6,068 (less 2,093 = 3,975 this year).
Year 3: Cumulative revenue = 4,100 × 100% = 4,100 (less 3,034 = 1,066 this year); cumulative expenses = 8,200 (less 6,068 = 2,132 this year).
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Worked Example – Commercial Fixed-Price Contract (IG15–IG21)
Bridge construction: fixed price 9,000, a Year-2 variation, and materials stockpiled at year-end
Initial revenue 9,000, initial cost estimate 8,000; Yr1 cost estimate revised to 8,050; Yr2 customer-approved variation +200 revenue / +150 costs; Yr2 year-end includes 100 of stored materials not yet used
Stage of completion EXCLUDES the 100 of stored materials from costs-incurred, since they don't reflect work performed → Year 2 stage = 74% (not higher).
Year 1: Total revenue 9,000, total costs 8,050, stage 26% → Revenue 2,340, Expenses 2,093, Surplus 247.
Year 2: Total revenue 9,200 (incl. variation), total costs 8,200, stage 74% → cumulative revenue 6,808 (less 2,340 = 4,468 this year); cumulative expenses 6,068 (less 2,093 = 3,975 this year); Surplus this year 493.
Year 3: Stage 100% → cumulative revenue 9,200 (less 6,808 = 2,392 this year); cumulative expenses 8,200 (less 6,068 = 2,132 this year); Surplus this year 260. Total surplus over the contract = 1,000.
Year 2: Total revenue 9,200 (incl. variation), total costs 8,200, stage 74% → cumulative revenue 6,808 (less 2,340 = 4,468 this year); cumulative expenses 6,068 (less 2,093 = 3,975 this year); Surplus this year 493.
Year 3: Stage 100% → cumulative revenue 9,200 (less 6,808 = 2,392 this year); cumulative expenses 8,200 (less 6,068 = 2,132 this year); Surplus this year 260. Total surplus over the contract = 1,000.
10
Effective Date & Amendment Timeline (paras. 57–58)
Amendment history at a glance
Base Standard: periods beginning on/after 1 July 2002 (earlier application encouraged).
EffectiveChange
1 Jan 2017Para. 58 – IPSAS 33, First-time Adoption
1 Jan 2018Paras. 2, 3 deleted; para. 45 amended – The Applicability of IPSAS (Apr 2016)
Relatively few amendments compared to other early-numbered Standards – construction contract accounting has stayed largely stable since 2002.
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Relationship to IAS/IFRS – Comparison with IAS 11
Comparison – IPSAS 11 vs IAS 11
IPSAS 11 is drawn primarily from IAS 11, Construction Contracts (an IFRS Standard subsequently withdrawn and replaced by IFRS 15 in the private sector – IPSAS 11 has NOT followed that path and remains construction-contract-specific pending IPSAS 47's eventual broader rollout).
Additional public-sector commentary throughout, to clarify applicability Terminology: "revenue," "statement of financial performance" (IPSAS 11) vs "income," "income statement" (IAS 11) IPSAS 11 includes BINDING ARRANGEMENTS that aren't legal contracts within scope – IAS 11 does not IPSAS 11 explicitly includes COST-BASED and NONCOMMERCIAL contracts within scope IPSAS 11 clarifies the immediate-expected-deficit rule applies ONLY to full-cost-recovery contracts IPSAS 11 adds extra Implementation Guidance examples for NONCOMMERCIAL construction contracts (§8)
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Statement / Process Mapping
Recognition decision map
- Is this a single contract, or should it be COMBINED/SEGMENTED per §2's tests?
- Is the outcome reliably estimable (fixed-price para. 31 tests, or cost-plus para. 32 tests)? If yes → recognize by STAGE OF COMPLETION (§5)
- If not reliably estimable → revenue limited to recoverable costs incurred; no surplus recognized (§5)
- Was the contract intended, at inception, for FULL cost recovery? If yes AND a deficit becomes probable → recognize the WHOLE expected deficit immediately (§6)
- Do estimates change as the contract progresses? → treat as a change in accounting ESTIMATE (IPSAS 3), applied prospectively (§7)
Concept-to-statement mapping table
IPSAS 11 conceptStatement(s)Notes
Revenue & costs by stage of completionSOFPerfPercentage-of-completion method
Costs relating to future contract activitySOFPRecognized as an asset (contract work in progress)
Expected deficit (full-recovery contracts)SOFPerfRecognized immediately, in full
Gross amount due FROM customersSOFPAsset – costs + surpluses exceed billings
Gross amount due TO customersSOFPLiability – billings exceed costs + surpluses
Revenue recognition methods, stage-of-completion methodsNotesMandatory per para. 50
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Related Standards – Cross-Reference Map
How IPSAS 11 connects across the IPSAS body of literature
StandardNature of the connection
IPSAS 3Governs changes in contract-revenue/cost estimates as accounting estimate changes (§7)
IPSAS 5Allowed-alternative borrowing cost capitalization can be an allocable general contract cost (§4)
IPSAS 9Service-agreement revenue directly related to construction (project managers, architects) is dealt with HERE, not under IPSAS 9 (§1)
IPSAS 19Contingent liabilities/assets from warranty costs, claims, penalties, and restructuring provisions (§7)
IPSAS 33First-time adoption interaction – effective-date mechanics (§10)
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Quick-Reference Glossary
Contractor
An entity performing construction work under a construction contract – includes a general/prime contractor, subcontractor, or construction manager.
Retentions
Progress billings withheld until specified contract conditions are met or defects rectified.
Progress billings
Amounts of contract revenue billed for work performed, whether or not yet paid.
Advances
Contract revenue received by the contractor before the related work is performed.
Percentage of completion method
Recognizing contract revenue/costs by reference to the stage of completion at the reporting date.
Variation
A customer-instructed change in the scope of contracted work.
Financial statement key
SOFP Statement of financial position
SOFPerf Statement of financial performance
Notes Notes to the financial statements