Construction projects tend to be long and complex, forcing businesses to rely on judgments and estimates about their final account position.

The industry typically uses the percentage-of-completion accounting method, recognising revenue and margin proportionately over time as the project progresses rather than upon completion. Even with the changes to FRS 102, taking effect on 1 January 2026, most contracts are still likely to follow this approach. However, businesses now need to work through the five-step revenue recognition model embedded in the new accounting standards.

Key issues for construction businesses under the new revenue model

Identification of performance obligations

Each contract will need to be analysed to identify the specific performance obligations to the customer. Although contracts may involve multiple asset handovers, if those deliverables are interlinked and cannot be fulfilled separately, they may represent a single performance obligation. Careful consideration should therefore be given to the terms and interconnectivity of contracts.

Determining and allocating transaction price

Change orders, variations and liquidated damages are all integral to the construction industry. These components will each need to be assessed against the guidance on variable consideration to determine the value of transaction price recorded at the beginning of the contract and throughout the stages of completion.

Recognising revenue

Revenue recognition over time is expected to be unchanged on adoption of the new revenue model. However, consideration will need to be given to how over time progress is measured. The amendments allow the use of an input method or an output method, which needs to be applied consistently to all similar contracts. Consideration may need to be given to the incorporation of defect obligations.

Costs of obtaining a contract

The amendments introduce new guidance on the costs of obtaining a contract, which may change current accounting practices. Costs to obtain a contract may be recognised as an asset if the costs are incremental and are expected to be recovered. However, costs to obtain a contract should be capitalised if they are explicitly chargeable to the customer, irrespective of whether the contract is won or not. Businesses will therefore need to assess whether pre-contract costs, including viability assessments, pre-planning costs etc meet the new requirements to be capitalised.

Method of adopting the new revenue model

The standards permit businesses to make adjustment to opening reserves for revenue contracts that are open at implementation or apply retrospectively with restatement of comparatives. Management will need to determine the most appropriate method of adopting the changes for their business, considering both the impact of the amendments and associated resource capacity.

With 1 January 2026 less than six months away, construction businesses should not delay their assessment of the amendments.

How we can support your construction business

We have a team of accounting and financial reporting experts experienced in UK GAAP and IFRS. We can help you understand the impact of the revised standards on your management information, financial statements and business operations, providing practical guidance on how to implement them effectively and efficiently. We can also help you plan communications with your stakeholders and ensure your financial statements are clear, transparent and compliant with the new requirements.

To discuss the impact of these changes on your construction business, please get in touch with Kelly Boorman, Sarah Waddington or your usual RSM contact.

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