Under IFRS 15 as endorsed by SOCPA, most Saudi construction contracts are recognised over time rather than on handover — meaning you book revenue and margin as the work is performed, not when the client signs off or when you issue an IPC. The practical mechanism for the vast majority of contractors is the cost-to-cost input method: measure the cost incurred to date against the total cost expected at completion (EAC), and apply that percentage to the contract revenue. Everything else — variation orders, claims, retention, advance payments, loss provisions — adjusts either the numerator, the denominator, or the contract revenue that percentage is applied to. This article walks through the mechanics with a SAR example, then explains why the quality of your job costing data, not your accounting policy, is usually what decides whether the number is right. Treatment always needs confirming with your own auditor; this is a working guide, not an audit opinion.

What SOCPA endorsement of IFRS 15 actually changed

Saudi Arabia adopted IFRS as endorsed by SOCPA (the Saudi Organization for Chartered and Professional Accountants), and IFRS 15 Revenue from Contracts with Customers replaced the old IAS 11 Construction Contracts standard. For contractors, the headline is that there is no longer a separate standard for construction. You apply the same five-step model as everyone else: identify the contract, identify the performance obligations, determine the transaction price, allocate it, and recognise revenue as each obligation is satisfied.

In practice, most Saudi construction contracts still end up recognised over time, so the reported numbers often look similar to the old percentage-of-completion approach. But the reasoning is different, and the terminology changed in ways that matter for your financial statements — 'costs and estimated earnings in excess of billings' became contract assets, and 'billings in excess' became contract liabilities.

The endorsement point is worth being precise about: SOCPA endorses IFRS with limited additional requirements and disclosures for Saudi entities. Your auditor is the authority on whether any of those apply to your entity type and size, and on judgement calls specific to your contracts.

Why most construction contracts qualify for over-time recognition

IFRS 15 lets you recognise revenue over time if any one of three criteria is met. The one that catches most construction work is this: the entity's performance creates or enhances an asset that the customer controls as it is created. If you are building on the client's land, that is usually straightforward — the works become the client's property as they are constructed.

The second relevant criterion is that the asset has no alternative use to the contractor and the contractor has an enforceable right to payment for performance completed to date. This one matters for design-build, fit-out, and fabrication contracts where the client does not yet control the asset. 'Enforceable right to payment' means more than a right to recover costs on a client default — it means payment for work done plus a reasonable margin, and it depends on the actual contract wording and Saudi law.

If neither applies, revenue is recognised at a point in time, typically on handover. That is unusual for main contracting but does appear in speculative development and some equipment supply arrangements. Do not assume over-time recognition; document the criterion you are relying on, contract by contract, and have your auditor review the conclusion.

Customer controls the asset as it is created — most on-site building works
No alternative use plus enforceable right to payment including margin — many fabrication and bespoke fit-out contracts
Customer simultaneously receives and consumes the benefits — recurring services such as facilities maintenance

The cost-to-cost input method, step by step

Once you have established over-time recognition, you need a method to measure progress. Input methods measure your effort; output methods measure what has been delivered (surveys of work performed, units produced, milestones). The cost-to-cost input method dominates in construction because it uses data the contractor already has to produce.

The formula is simple. Percentage complete equals cost incurred to date divided by total estimated cost at completion. Revenue recognised to date equals that percentage multiplied by the contract revenue. Revenue for the current period equals revenue recognised to date minus revenue recognised in prior periods.

Two adjustments are commonly missed. First, uninstalled materials: if you have bought and delivered significant materials that are not yet installed, including their cost in the numerator overstates progress. IFRS 15 requires an adjustment — typically recognise revenue equal to the cost of those materials, with zero margin, until they are installed. Second, wasted or abnormal costs (rework, remedial works after a defect, cost of a failed pour) do not represent progress and should be excluded from the numerator while remaining in the profit and loss.

The critical variable is not the cost to date — that comes straight off your ledger. It is the estimate at completion. Percentage complete is only as reliable as the EAC feeding it, and an EAC that has not been revised since tender is the single most common cause of profit being recognised early and then reversed.

A worked SAR example

Take a contract for a warehouse. Original contract value SAR 40,000,000. Tender cost estimate SAR 34,000,000, so a planned margin of SAR 6,000,000 (15 percent).

Year 1. Cost incurred to date is SAR 10,200,000. The EAC is reviewed and confirmed at SAR 34,000,000. Percentage complete is 10,200,000 / 34,000,000 = 30 percent. Revenue recognised is 30 percent of SAR 40,000,000 = SAR 12,000,000. Cost of sales is SAR 10,200,000. Gross profit is SAR 1,800,000. If you have certified IPCs of SAR 11,000,000 gross for the year, you carry a contract asset of SAR 1,000,000 — you have earned more than you have billed.

Year 2, before variations. Cost incurred to date reaches SAR 22,400,000, but the site team reports that piling overran and the revised EAC is now SAR 36,800,000. Percentage complete is 22,400,000 / 36,800,000 = 60.87 percent. Revenue recognised to date is 60.87 percent of SAR 40,000,000 = SAR 24,347,826. Year 2 revenue is SAR 12,347,826, cost of sales is SAR 12,200,000, and gross profit for the year is only SAR 147,826. Note what happened: the same 30 percentage points of physical progress delivered a fraction of the year 1 margin, because the EAC revision pulled the whole contract's expected margin down from SAR 6,000,000 to SAR 3,200,000 and the correction lands in the current period. This catch-up effect is exactly how IFRS 15 is meant to behave, and it is why an EAC that is refreshed monthly beats one refreshed at year end.

Year 2, with an approved variation. Suppose the client approves a variation order for additional mezzanine works at SAR 3,000,000, with expected cost SAR 2,400,000. Contract revenue becomes SAR 43,000,000 and EAC becomes SAR 39,200,000. If cost to date is unchanged at SAR 22,400,000, percentage complete is 22,400,000 / 39,200,000 = 57.14 percent and revenue to date is SAR 24,571,429. Because the variation carries margin and only a small part of its cost has been incurred, the percentage drops slightly while total expected profit rises — a normal and correct result.

Variation orders, claims, and the constraint on variable consideration

Variations are contract modifications under IFRS 15. Where the additional work is not distinct from the work already in progress — which is the usual case for a variation inside a single integrated construction obligation — you account for it cumulatively: add the variation price to contract revenue, add the expected cost to the EAC, and recompute percentage complete. The catch-up adjustment flows through the current period, as in the example above.

The harder question is when to include an unpriced variation, a claim, or a bonus. These are variable consideration, and IFRS 15 applies a constraint: include only the amount for which it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty resolves. In practice that means a signed instruction with an agreed rate goes in; a submitted claim for prolongation that the consultant has not acknowledged generally does not, or goes in only at a heavily constrained amount.

This is where discipline pays. Contractors who track variations by status — instructed, priced, submitted, certified, disputed — can defend their revenue position to an auditor line by line. Contractors who keep variations in a spreadsheet on someone's laptop usually cannot, and end up either understating earned revenue or booking claims that later reverse.

Liquidated damages for delay work the same way in reverse: expected LDs reduce the transaction price and should be reflected as soon as they become probable, not when the client deducts them from a certificate.

Contract assets, contract liabilities, retention and advances

IFRS 15 replaced the over-billing and under-billing language with a balance-sheet presentation. A contract asset arises when revenue recognised exceeds amounts billed and your right to payment is still conditional on something other than the passage of time. A receivable arises when the right to consideration is unconditional — typically once an IPC is certified. A contract liability arises when billings or cash received exceed revenue recognised.

Retention (ضمان أعمال) is the point where practice most often goes wrong. Retention withheld from a certified IPC does not reduce revenue. You have earned it; the client is simply holding it. It should be recognised as revenue and presented as a receivable or contract asset depending on whether release is conditional only on time or on defect-liability performance. Retention held for long defect-liability periods may need discounting if the financing component is significant, though many contractors conclude it is not — confirm with your auditor.

Advance payments are the mirror image. An advance received against a bank guarantee is cash, not revenue. Record it as a contract liability and release it as the recovery deductions are applied through subsequent IPCs, in line with the contractual recovery formula. The advance also does not affect percentage complete, because it neither changes cost incurred nor the EAC. A significant advance held for a long period may contain a financing component that requires separate treatment.

VAT sits outside all of this — output VAT on an IPC under ZATCA rules is a liability, never revenue — but the timing of your tax invoice and the timing of your revenue recognition can legitimately differ, and the reconciliation between them is a standard audit request.

Loss-making contracts

IFRS 15 does not use the old IAS 11 onerous contract mechanism; the provision falls under IAS 37. The principle a contractor needs is unchanged in effect: as soon as the total expected cost to complete a contract exceeds the total expected revenue, the entire expected loss is recognised immediately, not spread over the remaining percentage complete.

Continuing the example: if the EAC rose to SAR 44,000,000 against contract revenue of SAR 43,000,000, you have a SAR 1,000,000 expected loss. Any profit recognised in prior periods reverses, and the full remaining loss is booked in the current period. There is no smoothing.

This makes the honesty of your EAC a financial reporting issue, not just a commercial one. A site team that holds back bad news for a quarter does not delay the loss; it concentrates it, and it usually turns into an audit adjustment. The practical control is a monthly cost-to-complete review with the project manager, quantity surveyor and finance in the same conversation, with prior estimates visible so movements have to be explained.

Where the numbers come from: job costing and EAC in your ERP

Every figure in the calculation above is an output of cost control, not of accounting. Cost incurred to date must be complete and correctly coded — including accrued subcontractor work done but not yet certified, materials consumed but not yet invoiced, and plant and equipment charges. If those accruals are missing, percentage complete is understated and you underclaim revenue. If costs are coded to the wrong contract or the wrong cost code, the EAC review is built on noise.

The EAC needs the same rigour. A workable EAC is built cost code by cost code: original budget, approved budget movements from variations, committed cost from purchase orders and subcontracts, actual cost to date, and a forecast of cost to complete that the responsible engineer owns. The sum is your EAC. Doing this in spreadsheets is possible but fragile — the version that gets emailed to finance is rarely the version the site is working to.

This is the specific reason job costing by cost code, subcontract and retention tracking, and IPC billing belong in one system rather than three. IntellaQ Flow's construction capabilities are built around exactly this chain: cost codes carrying budget, committed, actual and forecast side by side; progress claims and advance recovery running through ZATCA-compliant IPC billing; retention tracked per subcontract and per client contract. See the construction ERP overview at /industries/construction/ for how the job costing, procurement, subcontract and billing modules connect.

Two habits separate contractors whose revenue recognition survives audit from those whose does not. First, close the cost ledger monthly and review the EAC on every live contract, not just at year end. Second, keep an audit trail on EAC changes — who revised it, when, and why — because that trail is what an auditor tests when a contract's margin moves. As always, agree your specific policy choices, your over-time criterion, and your treatment of unpriced variations with your auditor before you close a period on them.

Percentage-of-Completion for Saudi Contractors (IFRS 15)