In construction companies, the key audit risk is percentage-of-completion accounting. A 1% error in costs to complete on a PLN 100m contract can mean a PLN 1m profit difference. Auditors therefore test project manager estimates, progress reports and contract documentation in detail.
IFRS 15 and construction contracts
IFRS 15 requires revenue to be recognised over time when the customer controls the asset as it is created, or when the contractor has no alternative use for the asset and has an enforceable right to payment for work performed. General contractors working on infrastructure or customer-controlled sites commonly meet those criteria.
Under local Polish accounting rules, KSR 3 and the Accounting Act follow similar logic: revenue and margin are recognised by reference to stage of completion when progress can be measured reliably.
Percentage of completion
The most common input method is: costs incurred to date divided by estimated total contract costs. The formula is simple, but the estimate is not. Total costs must be updated for claims, change orders, subcontractor offers, material price changes and schedule delays.
| Audit area | What the auditor tests |
|---|---|
| Costs to complete | Approval by the project manager, comparison with prior budgets and support from subcontractor offers. |
| Progress reports | Consistency between accounting progress, site reports and accepted milestones. |
| Change orders | Whether scope changes are approved and included in transaction price only when supportable. |
| Cut-off | Whether December costs and revenue are recognised in the correct period. |
Loss provisions and retentions
If estimated total costs exceed estimated total revenue, the whole expected loss is recognised immediately. It does not matter whether the contract is 10% or 90% complete. Delaying the provision until the loss is invoiced is a common audit adjustment.
Retentions are amounts withheld by the customer until warranty conditions are met. They should be classified based on expected release date; warranty-period retentions are often long-term receivables and may require discounting under IFRS.
Delay penalties usually reduce revenue when they become probable. Claims against the customer are much more sensitive: variable consideration can be recognised only when it is highly probable that there will not be a significant reversal.
Construction consortia
Large construction contracts are often delivered by consortia. The auditor analyses the agreement, not the label. If each participant has direct rights to assets and obligations for liabilities, the arrangement may be a joint operation. If the parties have rights to net assets, it may be a joint venture accounted for using the equity method.
Pre-audit checklist for general contractors
- Contract status schedule: budget, actual costs, progress and margin.
- Written costs-to-complete reports approved by project managers.
- Progress certificates, acceptance protocols and site reports.
- Register of change orders, claims and disputes.
- Loss-making contract analysis and provision calculation.
- Retention schedule with expected release dates.
- Consortium agreements and settlement reconciliations.
Frequently asked questions
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JMFC audits long-term contracts, project estimates, retentions and construction consortia.
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