FRS 102 Revenue for Construction: Variations, Claims and Incentives (2026)

Construction contracts are rarely fixed at signing. Variations (formal change orders), claims (disputed entitlements), and incentive payments are routine. The question for revenue recognition is when each of these flows into the accounts. FRS 102 Section 23 sets out specific tests, and the treatment of claims in particular is one of the more judgemental areas in construction accounting. Get it wrong and you either over-state revenue (recognising claims that ultimately fail) or under-state revenue (deferring claims that were genuinely earned).

Variations: the easy case

A variation is a change to the scope or specification of the works instructed by the employer or its agent. Where a variation is formally instructed and the price is agreed, it becomes part of contract revenue at the agreed value, recognised proportionately under POC alongside the original contract revenue.

Variations that are instructed but not yet priced raise a more nuanced question. The work has to be performed (because the contract requires it) but the revenue cannot be measured exactly until pricing is agreed. The accounting position:

1. 1Where the contractor and employer have a clear pricing mechanism (rates from the contract, dayworks rates, cost-plus arrangement), recognise the variation at the most reliably measurable estimate.
2. 2Where the pricing is genuinely uncertain, recognise the variation only to the extent of recoverable costs (cost recovery method) until pricing is agreed.
3. 3Document the basis for the recognition position in writing at each reporting date.

Claims: the harder case

A claim is an amount the contractor is seeking from the employer that is not (yet) part of the agreed contract revenue. Common claim categories: extension of time costs (loss and expense following programme delay), variations in dispute, ground conditions claims, design issues, customer-caused disruptions. Section 23 permits claim revenue to be included in contract revenue only when:

1. 1Negotiations with the employer have reached an advanced stage where it is probable the customer will accept (or has informally indicated acceptance of) the claim.
2. 2The amount that will probably be accepted can be measured reliably.

Both tests must be met. A claim that is probable but cannot be reliably measured is not recognised. A claim that can be measured precisely but where acceptance is doubtful is not recognised.

Incentive payments and bonuses

Incentive payments (early completion bonuses, performance-related payments, KPI-linked bonuses) are recognised on the same probable-and-reliably-measurable test. The recognition timing typically depends on contract structure:

• KPI-based bonuses with measurable criteria: recognised proportionately as the underlying performance is delivered.
• Early completion bonuses: recognised when achievement is reasonably certain (typically late in the contract life).
• Discretionary bonuses without contractual entitlement: not recognised until paid.
• Penalty avoidance bonuses (incentive to avoid liquidated damages): recognised when the avoidance is reasonably certain.

The documentation that defends recognition

For each claim or incentive that is recognised in revenue at year-end, the contractor should hold:

1. 1A written submission to the customer setting out the basis for the claim and the amount sought.
2. 2Customer correspondence indicating the negotiation status (acceptance in principle, partial acceptance, scope of dispute).
3. 3A reasoned written assessment by the commercial team of the probability and the reliably measurable amount.
4. 4Sign-off by the commercial director or equivalent.
5. 5A reconciliation to the original contract revenue showing the adjustment.

Without this documentation, audit adjustments to defer or write off claim revenue are common.

Worked example: claim recognition decision

A contractor on a £6m contract has submitted three items for additional payment at year-end:

Common questions

What if a claim we recognised is later rejected?

The previously recognised revenue is reversed in the period the rejection becomes probable. This is a change in estimate, not a prior period error, so it goes through the current year income statement. The disclosure should explain the reversal where the amount is material.

How does this interact with onerous contract testing?

Claim revenue feeds into the total expected revenue side of the onerous contract test. A claim that is probable and reliably measurable counts; a claim that is doubtful does not. Where claim revenue would prevent a contract from being onerous but is itself uncertain, the conservative position is to test for onerousness without the claim.

What about claims that go to formal dispute resolution?

Once a claim is in adjudication, arbitration, or litigation, the probable-and-reliably-measurable test usually fails: the outcome is genuinely uncertain. Revenue is typically deferred until the dispute is resolved. Disclosure of the dispute, the position taken, and the range of outcomes is required.