IFRS 9 ECL Calculator
for Construction

IFRS 9 Expected Credit Losses for Construction

Construction and engineering entities have among the most complex trade receivable profiles for IFRS 9 ECL purposes. The industry's project-based nature creates large, concentrated receivable balances that are subject to milestone disputes, contractual set-offs, retention holdbacks, and the inherent cyclicality of construction activity. Historical loss rates for construction receivables are consistently higher than for most other industries — not because construction clients are less creditworthy per se, but because the prevalence of disputes, variations, and counter-claims means that amounts billed are more frequently contested and reduced. The IFRS 9 provision matrix must reflect this reality, and the forward-looking adjustment should consider construction market indicators such as building permit trends, material cost inflation, and contractor insolvency rates.

Receivable Characteristics — Construction

Progress billing receivables are the primary category — these represent work certified by the project engineer or quantity surveyor but not yet paid. Payment terms of 30–60 days are standard, but actual payment often lags due to disputes over scope, quality, or variations. Retention receivables are contractually withheld amounts (typically 5–10% of each progress claim) that are released only after the defect liability period expires (6–24 months post-completion). These retentions are NOT overdue in the conventional sense and should not be classified as aged receivables — they are contractual holdbacks with a defined release date. Subcontractor back-charges arise when the main contractor deducts costs for defective work or delays from subcontractor payments. For the main contractor, these create receivable balances that carry high dispute risk.

Forward-Looking Factors

Construction market indicators are critical for forward-looking ECL adjustment. Building permit data and planning approval trends are leading indicators of future construction activity (and therefore client financial health). Material cost inflation directly affects project profitability — when costs escalate beyond contracted prices, disputes increase and client payment behaviour deteriorates. Interest rate changes affect project financing costs and can trigger project cancellations or delays. Government infrastructure spending announcements provide forward-looking information about public sector project pipelines. Contractor insolvency statistics are a direct indicator of credit risk in the supply chain.

Regulatory and Audit Context

Construction entity ECL estimates are among the most frequently challenged by auditors due to the high estimation uncertainty. ISA 540 requirements are particularly relevant because construction receivables involve significant judgment about: the classification of retention versus overdue amounts, the treatment of disputed balances, the appropriate loss rate for project-related receivables, and the forward-looking adjustment during construction downturns. Common audit findings include: classifying retentions as overdue receivables (inflating the apparent aged balance), applying generic loss rates without adjusting for the dispute-heavy nature of construction, failure to specifically assess large individual project receivables, and inadequate forward-looking adjustment when construction market indicators are deteriorating.

Construction entities should separately disclose and assess retention receivables, certified progress claims, and disputed amounts. Auditors should verify that retentions are not incorrectly classified as overdue receivables in the aging analysis.