Construction Cost
Code: 5130Account Information
| Financial Statement | Income Statement |
| Normal Balance | Debit |
Definition
Master account for accumulating all costs related to executing construction contracts, such as direct materials, direct labor, subcontractors, equipment rental, and indirect overheads. These costs are transferred to "Contracts in Progress - Asset" to calculate project profitability.
Sub-accounts
📐 IFRS vs US GAAP Accounting Treatment
IFRS: Contract costs are recognized as expense when incurred, unless they meet capitalization criteria as part of a contract asset (e.g., contract fulfillment costs).
IFRS: Costs are measured at actual amount paid or payable. Capitalized costs are amortized over the contract period. GAAP: Same measurement with amortization period details.
IFRS: Disclose contract costs recognized as expense, capitalized costs and amortization method. GAAP: Additional disclosures on contract acquisition costs.
Example: Contractor purchases materials for SAR 500,000 for a project. SAR 500,000 is recognized as construction cost when materials are used on the project.
GAAP: Contract costs recognized as expense when incurred.
GAAP: Measured at actual amount paid or payable.
GAAP: Additional disclosures on contract acquisition costs.
Example: Materials purchased for SAR 500,000. Construction cost = SAR 500,000.
IFRS: Contract costs are recognized as expenses when incurred, and some costs are capitalized as part of the contractual asset. GAAP (ASC 606): Same principle, with details regarding capitalized contract costs.
❓ Frequently Asked Questions
A: Construction Cost is the main account that accumulates all direct and indirect costs related to executing construction and contracting contracts. These costs include direct materials, direct labor, subcontractors, equipment rental, and indirect overheads.
A: At the end of the accounting period, total construction costs are transferred to the "Contracts in Progress - Asset" account to calculate each project's profitability. Entry: Dr. Contracts in Progress - Asset, Cr. Construction Cost (by appropriate project).
A: Project profitability is determined using the Percentage of Completion method under IFRS 15: (Total actual project costs ÷ Total estimated project costs) × Total contract revenue. Revenue and cost are recognized at the same percentage.
A: Indirect costs (e.g., salaries of engineers supervising multiple projects, shared equipment rental, security expenses) are allocated to projects using a reasonable method (e.g., ratio of direct costs per project or labor hours).
A: Construction Cost is presented on the income statement deducted from Construction Revenue to determine gross profit (or loss) from construction activities. It appears as a major line item under operating expenses.