IAS 37 · Construction

IAS 37 Provision Calculator
for Construction

Pre-configured for construction provision types: defect liability provisions, onerous fixed-price contract provisions with cost overrun analysis, liquidated damages, subcontractor claims, and site environmental remediation.

Obligation Type

Present Obligation

Does a present obligation exist from a past event?

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IAS 37.14 — A provision shall be recognised when: (a) an entity has a present obligation from a past event; (b) it is probable that an outflow will be required; (c) a reliable estimate can be made.

IAS 37.36 — The amount recognised shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

IAS 37.39 — Where there is a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (expected value).

IAS 37.45 — Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to settle the obligation.

IAS 37.72 — A constructive obligation to restructure arises only when an entity has a detailed formal plan and has raised a valid expectation in those affected.

IAS 37 Provisions in Construction

Construction companies carry provision portfolios driven by the inherent risks of complex, long-duration projects: defect liability obligations, onerous contract provisions when cost overruns exceed bid margins, liquidated damages for project delays, and environmental obligations from site contamination. Construction defect provisions are a near-universal obligation, recognised when a project reaches practical completion and the defect liability period begins. For large contractors with portfolios of completed projects, the expected value method provides the most reliable measurement, weighted by historical defect data segmented by project type, construction method, and defect category. Onerous contract provisions are critically important for construction companies because fixed-price contracts — the dominant contracting model — expose contractors to the full risk of cost overruns. When estimated total costs exceed contracted revenue, the loss must be immediately provisioned regardless of the project's completion stage.

Measurement Considerations for Construction

Onerous contract provisions for construction require precise estimation of the total cost to complete. The May 2020 IAS 37 amendment expanded what constitutes 'costs of fulfilling' to include not just incremental costs but also an allocation of other costs that relate directly to fulfilling the contract. For construction, this means direct labour, materials, subcontractor costs (incremental) plus site supervision, project management, quality assurance, and equipment depreciation (allocated directly related costs) are all included. The provision equals the total expected loss on the contract (costs minus revenue). This provision is distinct from the IFRS 15 revenue recognition calculations — it is an additional charge recognised immediately when the contract becomes onerous. Liquidated damages provisions should be measured at the contractual rate applied to the expected delay period, adjusted for the probability of achieving contractual extensions of time.

Regulatory Context and Audit Considerations

Construction defect liability periods vary by jurisdiction: typically 12-24 months for general defects, with extended periods (6-10 years) for structural defects in many civil law jurisdictions. National building codes create statutory obligations that exist independently of contractual warranty terms. Health and safety legislation (EU Framework Directive 89/391/EEC and national implementation) creates obligations for construction site safety that can give rise to penalty provisions. Auditors should evaluate whether construction companies have identified all projects where costs to complete exceed remaining revenue, particularly in periods of construction cost inflation, supply chain disruption, or labour shortages.

Common Provision Types in Construction

construction defect

Defect liability provisions for completed projects — structural, waterproofing, mechanical/electrical defects during warranty periods

Typical: 1-3% of contract value Timeline: 12-24 months (defect liability period) Method: Expected Value
onerous contract

Fixed-price construction contracts where cost overruns have made the contract loss-making

Typical: Estimated total loss on contract Timeline: Remaining contract duration Method: Best Estimate
legal claim

Liquidated damages claims from clients for late delivery, subcontractor claims, professional negligence

Typical: Contractual LD rate × delay period Timeline: 1-5 years Method: Best Estimate
environmental

Site contamination remediation, demolition waste disposal, hazardous material removal

Typical: €100K-€10M Timeline: 1-10 years Method: Best Estimate
regulatory penalty

Health and safety violations, building code non-compliance, environmental breaches during construction

Typical: €10K-€5M Timeline: 1-3 years Method: Best Estimate

Worked Example: Atlas Construction Group NV

Atlas has a fixed-price contract for a commercial office building with contract revenue of €18,000,000. At the reporting date, the project is 60% complete but cost overruns have made the contract onerous:

Total contract revenue: €18,000,000. Total estimated cost: €19,800,000 (including incremental costs of €17,200,000 and allocated directly related costs of €2,600,000 per May 2020 amendment). Total expected loss: €19,800,000 - €18,000,000 = €1,800,000. This loss must be recognised immediately as an onerous contract provision, regardless of the project's 60% completion stage. The provision covers the total contract loss, not just the loss on the uncompleted portion.

Provision Amount
€1.800.000
Regulatory Context: National building codes create statutory defect liability obligations independent of contractual terms. The May 2020 IAS 37 amendment on costs of fulfilling onerous contracts has particular significance for construction. Health and safety legislation creates penalty exposure for construction site incidents.

Frequently Asked Questions — Construction

When should a construction contract be recognised as onerous under IAS 37?
A construction contract becomes onerous when the unavoidable costs of meeting the contractual obligations exceed the expected economic benefits (contract revenue). The 'costs of fulfilling' include both incremental costs (materials, direct labour, subcontractors) and an allocation of directly related costs (site supervision, project management, quality assurance, equipment depreciation) per the May 2020 IAS 37 amendment. The total expected loss must be provisioned immediately when identified, regardless of the project's completion stage.
How should construction defect provisions be calculated?
For contractors with portfolios of completed projects, use the expected value method (IAS 37.39). Segment historical defect data by project type, construction method, and defect category (structural, waterproofing, M&E, finishes). Weight each outcome by its probability and aggregate across the portfolio of projects in their defect liability period. For individual large projects, specific assessment based on known defects, building surveys, and expert reports is more appropriate.
What is the impact of the May 2020 IAS 37 amendment on construction companies?
The May 2020 amendment to IAS 37 significantly affected construction companies by expanding the definition of 'costs of fulfilling' an onerous contract. Previously, some entities used only incremental costs (materials, direct labour), which produced a lower fulfillment cost and triggered fewer onerous contract provisions. The amendment clarified that directly related costs (site management, quality control, equipment depreciation) must also be included. This means more construction contracts may be identified as onerous, and onerous contract provisions will be larger.
How should liquidated damages provisions be measured for construction delays?
Liquidated damages provisions should be measured at the contractual LD rate multiplied by the expected delay period. Assess the probability of achieving extensions of time (EOT) that would reduce or eliminate LD exposure. If an EOT claim is probable (>50%), the provision should reflect the reduced delay period. Consider whether the LD clause is enforceable under the applicable law — some jurisdictions allow courts to reduce disproportionate LDs (penalty clauses). Include the costs of acceleration measures if these are being implemented to mitigate delay.
How should subcontractor claims be provisioned in construction?
Subcontractor claims against the main contractor should be assessed individually. Common claims include: additional costs for scope changes, delay and disruption claims, unpaid variation orders, and defect rectification disputes. Each claim should be assessed for probability (is an outflow more likely than not?) and amount (what is the best estimate of the expected payment?). For main contractors defending against subcontractor claims, the obligation is assessed from the contractor's perspective — even if the contractor intends to pass the claim to the client, the contractor's direct obligation to the subcontractor may create a provision.

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