Construction is one of the only industries where you can be busy, winning work and profitable on paper, and still run out of cash. A big part of that comes down to how long-term contracts are accounted for.
When a job runs over several months or years, the obvious question is: when do you record the income and the profit? Not simply when you raise an application or invoice, and not when the cash finally lands. Here's the plain-English version of what FRS 102 (the accounting rules most UK companies follow) actually says, including the important changes that apply from 2026.
Why long jobs are different
On a small job, such as a day's repair or a week's refit, there's no real question. You do the work, you invoice it, the income lands in that month's figures. But on a contract that spans your year-end, the timing of revenue genuinely changes your accounts. Record it all at the start and you're claiming profit you haven't earned yet; record it all at the end and a year of real work shows up as nothing, followed by a spike.
Neither reflects reality, so the accounting rules don't allow either. Instead, FRS 102 asks you to recognise revenue and profit as the work progresses, spread across the life of the contract. If a job is 40% complete at your year-end, broadly 40% of its expected revenue (and the profit that goes with it) belongs in that year's accounts, regardless of what you've invoiced or been paid.
Stage of completion — the engine of the whole thing
Everything rests on one estimate: how far along is each job, really? In practice firms measure this either by output (valuations, surveys and certified work to date) or by input, usually costs incurred so far as a share of total expected costs.
Both are only as good as the numbers behind them, and an optimistic forecast of final costs quietly corrupts everything downstream. It overstates the total profit the job is expected to make, and if you measure progress by costs incurred, it overstates the percentage complete too. Those two errors compound, so the revenue and profit recognised to date can be significantly wrong, and they stay wrong until the forecast is corrected, usually as a painful adjustment in a later period. The discipline that matters here isn't really accounting. It's having reliable, job-by-job cost records and honest forecasts to complete. That's what your reported profit is built on.
A worked example: one job, two very different profit figures
Numbers make this clearer than words, so here is an illustration with round figures. The firm has a £240,000 fixed-price contract to refurbish a commercial unit, expected to cost £200,000 in labour, materials and subcontractors, so £40,000 of profit over the whole job. At the year end the job is part-way through.
| At the year end | What the forecast says | If the forecast is £20,000 too optimistic |
|---|---|---|
| Costs incurred so far | £150,000 | £150,000 |
| Total expected costs | £200,000 | £220,000 (the true figure) |
| Percentage complete (costs to date ÷ total costs) | 75% | 68% |
| Revenue recognised (75% / 68% of £240,000) | £180,000 | £163,600 |
| Profit recognised to date | £30,000 | £13,600 |
| Amount invoiced so far (applications) | £160,000 | £160,000 |
| Shown in the balance sheet | £20,000 amount recoverable on contract | £3,600 amount recoverable on contract |
Same job, same invoices, same cash. The only thing that changed is the honesty of the forecast to complete, and the profit in the accounts moved by £16,400. That is the compounding I described above: the lower margin and the lower percentage complete pull in the same direction. If the firm had already paid itself dividends on the £30,000 version, it has a problem that only shows up next year.
One more thing the example shows. In the first column the firm has earned £180,000 of revenue but invoiced only £160,000, so £20,000 is work done and not yet billed. That is a real asset, and a bank will want to see it supported by signed valuations, not by a spreadsheet nobody has checked.
New from January 2026: the five-step model
For accounting periods beginning on or after 1 January 2026, the revenue section of FRS 102 has been rewritten around a new five-step model, aligned with the international standard IFRS 15. In outline, the five steps are:
- Identify the contract
The agreement with your customer, including the messy reality of letters of intent and works orders.
- Identify the performance obligations
What you've actually promised to deliver. One build, or a build plus separate design and maintenance elements?
- Determine the transaction price
What you expect to be entitled to, including how variations, claims and incentives are treated.
- Allocate the price
If there's more than one promise in the contract, the price is split between them.
- Recognise revenue as each obligation is satisfied
Either over time, as the work progresses, or at a point in time, on handover.
The practical change for construction: most firms will still recognise revenue over time as the job progresses, but you now have to demonstrate the contract qualifies, rather than assume it does just because the job spans your year-end. Typically that means showing the customer controls the asset as it's built (their land, their building), or that you have an enforceable right to payment for work completed to date. For most properly drafted construction contracts the answer is yes, but it's now a question that has to be asked, contract by contract.
The bits that catch people out
| Area | What the rules say, and the trap |
|---|---|
| Variations & claims | Extra work and disputed amounts only count as revenue once it's sufficiently certain you'll be paid. Booking hoped-for claims as income overstates profit, and under the 2026 model the bar is, if anything, higher. |
| Retentions | The 5–10% held back, often for 12 months or more after completion, is revenue you've earned, so it sits in your accounts as money owed to you. But it isn't cash, and it needs forecasting like any other receipt. |
| WIP & over/under-billing | The difference between the value of work done (costs plus recognised profit) and what you've actually invoiced. Under-billing means you're funding the job; over-billing flatters the bank balance with money you haven't earned yet. |
| Loss-making jobs | If a contract is heading for a loss, FRS 102 says recognise the whole expected loss now — not gradually, and not at the end. Painful, but it stops a bad job quietly poisoning two years of accounts. |
The single biggest trap: profit is not cash
Everything above feeds one golden rule: profit and cash are not the same thing. A healthy-looking profit and loss account can sit on top of a genuinely tight bank balance, because:
- Retentions are profit now, cash in a year, assuming the client's still solvent when it's due.
- Payment application timing means the work is often weeks or months ahead of the money.
- Front-loaded billing can do the reverse, making early cash look better than the job really is, with a squeeze at the back end.
This is why a construction business can fail while reporting profits. The accounts are doing their job, measuring the work earned, but nobody's watching the gap between that and the money in the bank. The fix is a cash flow forecast that explicitly tracks retention releases and application timing, alongside the P&L, not instead of it.
Transition and Tax
Two final points worth having on your radar for 2026. First, moving to the new five-step model is a transition event. How each in-flight contract is treated when you switch can shift profit between years, and there are choices to make about how the change is applied. Second, tax broadly follows the accounts: if the new model makes your recognised profit land differently, whether lumpier, earlier or later, your Corporation Tax bill moves with it. That's manageable, but only if it's planned rather than discovered.
If your contracts span year-ends and you haven't yet looked at the 2026 revenue changes, now is the time: ideally before your first accounting period under the new rules begins, while there's still room to plan.
Long-term contracts FAQs
When do I record the income on a long-term construction contract?
As the work progresses, not when you raise an application or when the cash lands. If a job is 40% complete at your year-end, broadly 40% of its expected revenue and the profit that goes with it belongs in that year's accounts, regardless of what you've invoiced or been paid. Everything rests on an honest estimate of how far along each job really is.
What changes for construction contracts under FRS 102 from 2026?
For accounting periods beginning on or after 1 January 2026, the revenue section of FRS 102 has been rewritten around a five-step model aligned with IFRS 15. Most firms will still recognise revenue over time, but you now have to demonstrate the contract qualifies rather than assume it does. Typically that means showing the customer controls the asset as it's built, or that you have an enforceable right to payment for work completed to date.
How are retentions treated in my accounts?
The 5–10% held back, often for 12 months or more after completion, is revenue you've earned, so it sits in your accounts as money owed to you. But it isn't cash, and it won't be for a while. It needs forecasting like any other receipt, assuming the client is still solvent when it falls due.
What do I do if a contract is going to make a loss?
FRS 102 says recognise the whole expected loss now, not gradually and not at the end. It's painful, but it stops a bad job quietly poisoning two years of accounts. It also means your forecast of costs to complete needs to be honest, because that's what tells you a loss is coming.
Numbers on the page, money in the bank
We work with construction and trades businesses across Hampshire to get long-term contract accounting right, and to make sure the cash position is planned as carefully as the profit figure. Here's how I can help:
- Contract-by-contract review for 2026, confirming which jobs qualify for over-time recognition under the new five-step model
- WIP and stage-of-completion done properly: job costing and honest forecasts-to-complete, so reported profit is real
- Retention and cash flow forecasting that tracks when held-back money is actually due, application by application
- Tax planned around lumpier profits, so the transition doesn't produce a Corporation Tax surprise
- Plain English: direct access to a chartered accountant who knows CIS, DRC and the rest of construction's quirks
This post is intended as general guidance only and reflects FRS 102 as it applies in 2026, including the revised revenue requirements effective for periods beginning on or after 1 January 2026. The right treatment depends on the terms of each contract and your specific circumstances, so always seek advice for your own business.
