AS 7 Construction Contracts: A Practitioner Guide for FY 2026-27
AS 7 (Construction Contracts) is the Indian Accounting Standard that prescribes how companies must recognise revenue and costs arising from construction contracts using the percentage-of-completion method.
The Institute of Chartered Accountants of India (ICAI) issued AS 7 under the Companies (Accounting Standards) Rules, 2006, reaffirmed by the Ministry of Corporate Affairs (MCA) in the Companies (Accounting Standards) Rules, 2021. The revised standard became effective from 1 April 2003 and replaced the original AS 7 (1983), aligning Indian practice with international norms.
For FY 2026-27, AS 7 remains mandatory for all non-Ind AS companies undertaking construction contracts. EPC contractors must maintain rigorous cost-tracking systems and review total estimated costs quarterly to avoid sudden profit or loss swings due to cost escalations.
AS 7 at a Glance
AS 7 mandates that entities engaged in construction contracts recognise contract revenue and related costs by reference to the stage of completion. This standard primarily serves contractors, EPC companies, and infrastructure developers operating under the Accounting Standards framework in India.
| Field | Value |
|---|---|
| Standard Number | AS 7 |
| Full Name | Construction Contracts |
| Issuing Body | ICAI (Accounting Standards Board) |
| Notified By | MCA, Companies (Accounting Standards) Rules, 2006 (reaffirmed in Companies (Accounting Standards) Rules, 2021) |
| Effective Date | 1 April 2003 (revised; original AS 7 effective 1 April 1983) |
| Supersedes | Original AS 7 (1983) revised in 2002 to align with international practice |
| Equivalent Standard | AS 7 ↔ Ind AS 115 ↔ IFRS 15 |
| Applies To | Mandatory for all enterprises preparing financial statements under the Accounting Standards framework that undertake construction contracts. The standard prescribes the percentage-of-completion method for revenue recognition. Ind AS-applicable companies follow Ind AS 115 (which subsumed construction contracts). |
What is AS 7: Construction Contracts?
AS 7 defines how companies must account for revenue and costs arising from construction contracts. The standard requires entities to use the percentage-of-completion method, recognising contract revenue and expenses in proportion to work performed during each accounting period.
ICAI introduced this revised version of AS 7 in response to global developments and industry demand for more accurate reflection of contract performance. The revision replaced the completed contract method with percentage-of-completion as mandatory. This change aligned Indian accounting practices with those under international standards such as IFRS.
Contractors, project managers, statutory auditors, CFOs of infrastructure companies, and finance teams working on long-term projects refer most frequently to this standard.
Objective of AS 7
The objectives of AS 7 are:
- Prescribe accounting treatment of revenue and costs associated with construction contracts.
- Establish principles for allocating contract revenue and costs to accounting periods in which work is performed.
- Specify treatment of variations, claims, and incentive payments in construction contracts.
By achieving these objectives, AS 7 ensures that users of financial statements receive a true and fair view of an entity’s financial performance on long-term projects. This aligns directly with Section 129 of the Companies Act, 2013 requiring compliance with notified accounting standards.
Who Must Apply AS 7?
Entities covered, applicability table
All enterprises preparing financial statements under Indian Accounting Standards (AS), except those following Ind AS or IFRS frameworks, must apply AS 7 if they undertake construction contracts. This includes Level I (large), Level II (SMEs), and Level III enterprises as classified by ICAI guidance.
| Entity Category | Applicability |
|---|---|
| Level I Enterprises | Mandatory |
| Level II Enterprises | Mandatory |
| Level III Enterprises | Mandatory |
Ind AS-applicable companies must instead comply with Ind AS 115 (“Revenue from Contracts with Customers”).
Scope exclusions
The following are outside the scope of AS 7:
- Service contracts not related to construction (covered by AS 9).
- Real estate sales (covered by Guidance Note on Real Estate and/or AS 9).
- Sale of standardised goods even if customised (covered by AS 9).
When the standard does not apply
Service contracts not related to construction are covered under AS 9 Revenue Recognition. Real estate sales follow ICAI’s Guidance Note on Real Estate or are accounted for using principles in AS 9. Sale of mass-produced goods falls under general revenue recognition standards rather than construction-specific guidance.
Key Definitions under AS 7
| Term | Definition |
|---|---|
| Construction contract | Contract specifically negotiated for constructing an asset or group of interrelated assets. |
| Fixed price contract | Contractor agrees a fixed price or rate per unit; may have escalation clauses. |
| Cost plus contract | Contractor reimbursed allowable costs plus a percentage or fixed fee. |
| Percentage of completion method | Recognises revenue and expenses based on proportionate work completed during each period. |
| Stage of completion | Measured using cost-to-cost ratio or surveys or physical progress benchmarks. |
| Expected loss | Loss when estimated total costs exceed contract revenue; recognised immediately in full. |
Recognition and Measurement under AS 7
When to recognise
Under Para 21 of AS 7, an entity recognises contract revenue and related costs by reference to stage of completion only when it can estimate outcome reliably. For fixed price contracts this requires:
(a) Contract revenue is measurable reliably;
(b) Probable economic benefits will flow;
(c) Costs to complete and stage can be measured reliably;
(d) Costs attributable can be clearly identified.
If these criteria are not met, typically at early stages, revenue is recognised only up to recoverable costs incurred so far (“cost recovery” approach). Expected losses are recognised immediately in full regardless of stage or billing status.
Initial measurement
At inception:
Contract revenue comprises initial agreed amount plus variations/claims/incentives if probable and measurable reliably.
Contract costs include:
- Direct materials/labour/depreciation,
- Allocable indirect project overheads,
- Other directly attributable items such as mobilisation/site preparation.
Borrowing costs may be capitalised if they meet criteria under AS 16 Borrowing Costs.
Subsequent measurement
At each balance sheet date:
(a) Compute cumulative contract revenue = Total contract value × Stage completed.
(b) Current period revenue = Cumulative recognised less prior period recognised.
(c) Cumulative cost = Actual incurred + estimated-to-complete × Stage completed.
(d) If total expected cost exceeds total expected revenue at any point, recognise entire expected loss immediately as per Para 35.
Stage determination typically uses cost-to-cost method:
Stage (%) = Cumulative costs incurred ÷ Total estimated contract costs.
Work-in-progress (“WIP”) arises when recognised work exceeds billings; excess billings over WIP create a liability.
**Formula:**
Stage (%) = Cumulative Costs Incurred ÷ Total Estimated Contract Costs
Revenue Recognised = Stage (%) × Total Contract Revenue
Profit/Loss Recognised = Revenue Recognised − Costs Incurred
Expected Loss = Total Estimated Cost − Total Contract Revenue, book entire loss immediately when identified
Percentage of Completion Method - Cost-to-Cost Approach
The core principle is application of percentage-of-completion using cost-to-cost as default measurement basis per Para 30:
- Stage = Costs incurred ÷ Total estimated cost
- Revenue recognised = Stage % × Total contract value
- Cost recognised = Actual incurred
- Difference between cumulative recognised revenue versus billings results in WIP asset or excess billing liability
If outcome cannot be reliably estimated, revenue limited to recoverable incurred cost until uncertainty resolves (Para 31). Variations/claims/incentives added only when probable AND measurable reliably, not before. All foreseeable losses booked immediately without waiting for further progress.
Patron’s clients in infrastructure contracting have found that quarterly reviews prevent late-stage P&L shocks from unanticipated escalation or claims settlements.
Worked Examples on AS 7
Example 1: Cost-to-cost method - infrastructure contract
Maharashtra Infra Ltd enters a fixed price flyover project worth Rs 100 crore; total estimated cost Rs 80 crore.
As at March 31, 2026:
- Costs incurred Rs 32 crore
- Customer billed/certified Rs 35 crore
Computation Table
| Item | Amount (Rs crore) | Computation |
|---|---|---|
| Stage completed | 40% | Rs 32 / Rs 80 |
| Revenue recognised | Rs 40 | Rs 100 × 40% |
| Cost recognised | Rs 32 | Actual incurred |
| Profit recognised | Rs 8 | Rs 40 − Rs 32 |
| Billed | Rs 35 | As per customer certification |
| Unbilled WIP asset | Rs 5 | Rs 40 − Rs 35 |
Journal Entry
Dr Construction WIP Rs 5 crore
Dr Trade Receivables / Bank Rs 35 crore
Cr Contract Revenue Rs 40 crore
(Record current period contract revenue)
Dr Cost of Construction Rs 32 crore
Cr Materials/Labour/etc Rs 32 crore
(To record actual contract costs)
Example 2: Expected loss recognition
Krishna Construction has a fixed price job worth Rs 50 crore; initial estimate was profit but revised estimate shows total cost now at Rs 55 crore due to escalation.
Costs incurred so far: Rs 22 crore.
Computation Table
| Item | Amount (Rs crore) | Computation |
|---|---|---|
| Revised total cost | Rs 55 | Latest estimate |
| Expected loss | Rs 5 | Rs 55, Rs 50 |
| Stage completed | ~40% | Rs 22 / Rs 55 |
| Revenue recognised | Rs 20 | ~40% × Rs 50 |
| Cost recognised | Rs 22 | Actual incurred |
| Loss booked so far | Rs 2 | Revenue, Cost |
| Additional provision | Rs 3 | To reach full expected loss |
Journal Entry
Dr Cost of Construction Rs 22 crore
Cr Materials/Labour/etc Rs 22 crore
Dr Contract Receivable / WIP Rs 20 crore
Cr Contract Revenue Rs 20 crore
(Recognise current period revenue)
Dr Loss on Construction Contract Rs 3 crore
Cr Provision for Foreseeable Loss Rs 3 crore
(Recognise additional foreseeable loss immediately per Para 35)
Disclosure Requirements under AS 7
Disclosures under AS 7 are critical for users of financial statements to evaluate contract performance, WIP, and foreseeable losses. Schedule III to the Companies Act, 2013 requires transparent presentation of contract balances and revenue recognition methods. Auditors rely on these disclosures to assess compliance and financial statement reliability.
| Item | Requirement | Para Reference |
|---|---|---|
| Amount of contract revenue | Recognised as revenue in the period | Para 38(a) |
| Methods used to determine contract revenue | Cost-to-cost, surveys, etc. | Para 38(b) |
| Methods used to determine stage of completion | Of contracts in progress | Para 38(c) |
| Aggregate amounts of costs incurred and recognised profits | (less recognised losses) for contracts in progress at balance sheet date | Para 39(a) |
| Advances received | From customers | Para 39(b) |
| Retentions | Amounts held by customers | Para 39(c) |
| Gross amount due from customers | (WIP - excess billings) classified as asset | Para 41 |
| Gross amount due to customers | (Excess billings - WIP) classified as liability | Para 41 |
The auditor must verify these disclosures under SA 700 to ensure true and fair presentation of contract activity and balances.
Common Mistakes & Industry-Specific Considerations
Common errors auditors flag
- Using completed contract method instead of percentage-of-completion, not permitted under AS 7.
- Failing to recognise expected losses immediately in full.
- Incorrect stage of completion when costs incurred include items not contributing to progress (e.g., materials at site but not yet installed).
- Including subcontractor mobilisation advances as costs incurred for cost-to-cost computation.
- Recognising claims or variations as revenue before they are probable and reliably measurable.
- Failure to reclassify WIP and excess billings appropriately on the balance sheet.
Industry application notes
EPC contractors (where AS applies):
Cost-to-cost is the default method. Robust cost tracking is essential. Patron's audit practice frequently observes that quarterly reviews of total estimated costs help avoid late recognition of cost overruns or profit reversals.
Real estate developers:
AS 7 applies only where there is a construction contract with the end-customer. For outright sale of units, ICAI’s Guidance Note on Real Estate takes precedence. Distinguishing between AS 7 and AS 9 scenarios is vital for correct revenue timing.
Infrastructure (roads, ports, power):
Long-duration contracts often involve milestone-based billing. Variations and claims can be material; timing their recognition significantly impacts reported profit across periods.
AS 7 vs Ind AS 115 vs IFRS: Key Differences
AS 7 mandates the percentage-of-completion method for construction contracts, while Ind AS 115 introduces a five-step model covering all customer contracts. IFRS 15 mirrors Ind AS 115 with minor Indian carve-outs.
| Aspect | AS | Ind AS | IFRS |
|---|---|---|---|
| Scope | Construction contracts only | Ind AS 115 covers all revenue from contracts with customers | IFRS 15 same as Ind AS |
| Method | Percentage of completion mandated | 5-step model with control transfer; over-time vs point-in-time | Same as Ind AS |
| Expected loss | Recognised immediately in full | Onerous contract under Ind AS 37 | Same |
| Variation/claims | When probable + reliably measurable | When highly probable + reliably estimable; constraint on variable consideration | Same as Ind AS |
| Multiple performance obligations | Generally combined contract | Separate performance obligations identified | Same |
India’s adoption of Ind AS brought significant changes: multiple deliverables within a contract may now be split into separate performance obligations. Revenue recognition depends on when control transfers, not always proportionate to costs incurred. Expected loss rules now refer to onerous contracts per Ind AS 37 rather than direct full-loss recognition under AS 7.
Latest Amendments to AS 7 (FY 2026-27)
No amendments have been notified to AS 7 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.
Related Standards You Should Know
- [Ind AS 115](/ind-as-115-revenue-from-contracts-with-customers/), Replaces AS 7 for Ind AS-applicable companies; broader five-step model.
- [AS 9](/as-9-revenue-recognition/), Revenue recognition for non-construction contracts.
- [AS 16](/as-16-borrowing-costs/), Borrowing costs capitalisation for qualifying construction assets.
- [AS 29](/as-29-provisions-contingent-liabilities/), Provisions for foreseeable losses on construction contracts.
- [AS 28](/as-28-impairment-of-assets/), Impairment indicator for construction contract assets.
Need Help with AS 7 Compliance?
Patron Accounting LLP supports contractors, EPC firms, and infrastructure companies with every aspect of AS 7 compliance, from documentation through audit support. Our team combines technical expertise with practical experience across large-scale Indian projects.
Our services include:
- Statutory Audit
- Financial Reporting & Schedule III
- Disclosure Review
- Ind AS Advisory
Schedule a 30-minute consultation with our Ind AS team, Pune · Mumbai · Delhi · Gurugram.
Frequently Asked Questions (FAQs)
All companies preparing financial statements under Indian Accounting Standards (AS), except those following Ind AS or IFRS, must comply with AS 7 if they undertake construction contracts. This includes Level I, II, and III enterprises involved in infrastructure or project-based activities.
The percentage-of-completion method requires entities to recognise revenue and related costs based on the proportion of work completed during each accounting period. The most common measurement is cost-to-cost: cumulative costs incurred divided by total estimated contract costs.
While AS 7 applies only to construction contracts using percentage-of-completion, Ind AS 115 covers all customer contracts using a five-step model based on control transfer, over time or at a point in time, and may separate multiple deliverables within one agreement.
Entities must recognise the entire expected loss on a construction contract immediately once it becomes apparent that total estimated costs will exceed total contract revenue, regardless of stage completed or billing status. This aligns with Para 35 requirements.
In fixed price contracts, the contractor agrees to a set price or rate per unit, sometimes subject to escalation clauses. In cost plus contracts, the contractor receives reimbursement for allowable costs plus an agreed markup or fee.
Stage of completion can be measured by the cost-to-cost ratio (cumulative costs incurred divided by total estimated costs), surveys of work performed, or assessment of physical progress benchmarks, depending on which method best reflects actual work done.
If recognised revenue exceeds amounts billed, the difference appears as a WIP asset (“gross amount due from customers”). If billings exceed recognised revenue, this results in a liability (“gross amount due to customers”), both disclosed separately per Schedule III requirements.
Variations and claims are included in contract revenue only when it is probable that they will result in additional income and they can be measured reliably. Premature recognition before these conditions are met is not permitted under AS 7.
No. Real estate development falls under AS 7 only if there is a specific construction contract with an identified customer. For outright sale of units without such a contract, ICAI’s Guidance Note on Real Estate or AS 9 Revenue Recognition applies instead.
Mobilisation advances paid to subcontractors do not count towards actual work completed, they are pre-paid expenses until utilised in project execution. Including them prematurely inflates stage-of-completion percentages and misstates both revenue and profit figures under audit review.
About This Article
Reviewed by CA & CS Team · Patron Accounting LLP
Technical reviewer: CA Sundram Gupta, FCA
Last reviewed: 2026-05-02
Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Accounting Standards) Rules, 2006 (reaffirmed in Companies (Accounting Standards) Rules, 2021)) · IFRS Foundation