CONSTRUCTION CONTRACTS

WHAT IS A CONSTRUCTION
CONTRACT?

• It is a contract specifically negotiated for the construction

of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use
 CONSTRUCTION CONTRACTS INCLUDES:

• Contracts for the rendering of services which are directly related to the
construction of the asset

• Contracts for the destruction or restoration of assets, and the restoration of

the environment following the demolition of assets
 CONSTRUCTION CONTRACTS

• Generally long-term

• Date at which the contract is entered into and the date the contract is
completed normally falls on different reporting periods

• Primary issue is the timing of recognition of contract revenue and contract

costs
 TWO TYPES OF CONSTRUCTION
CONTRACTS:

• Fixed Price Contract – the contractor agrees to a fixed contract price, or a

fixed rate per unit of output, which in some cases is subject to cost escalation
clauses.

• Cost Plus Contract – the contractor is reimbursed for allowable or otherwise

defined costs, plus a percentage of these costs or a fixed fee.
 SATISFACTION OF PERFORMANCE
(OVER TIME)

• A. The customer simultaneously receives and consumes the benefits provided

by the entity’s performance as the entity performs.

• B. The entity’s performance creates or enhances an asset that the customer

controls as the asset is created or enhanced,

• C. The entity’s performance does not create an asset with an alternative use
to the entity and the entity has an enforceable right to payment for
performance completed to date
 ALTERNATIVE USE

• An asset does not have an alternative use to the entity if the entity is
restricted contractually from directing the asset for another use during
or after the asset’s completion.
 ENFORCEABLE RIGHT TO PAYMENT FOR
PERFORMANCE COMPLETED TO DATE:

• If the entity is entitled to an amount that compensates the entity for any
performance completed in the event that the customer or another party
terminates the contract for reasons other than the entity’s failure to perform
as promised.
• The amount referred above shall be sufficient for the entity to recover the
costs incurred in satisfying the performance obligation plus reasonable profit
margin.
• The compensation for a reasonable profit margin need not equal the profit
margin expected if the contract margin was fulfilled as promised.
 CONSTRUCTION CONTRACTS

• Generally, it is likely that the performance obligation is satisfied over time.

• However, the entity should still consider all available information to determine
whether one of the criteria is met.
• If the entity cannot demonstrate that a performance obligation is satisfied
over time, it is presumed to be satisfied at a point in time.