Construction Accounting Australia: A CPA's Practical Guide to AASB 15, Progress Claims, Retentions, Variations and Job Cost

May 27
17 min read

The construction accounting problem that costs builders $40k–$150k per quarter

Most Australian construction businesses can run a project. Fewer can tell you which one is making money. Almost none can show a bank a 13-week cash forecast that separates progress claim receipts from retention release windows, or a margin-by-project report that survives audit scrutiny.

The gap between "we built it" and "we know what it earned" is where money quietly disappears. Approved variations that never get invoiced. Retention that sits in the wrong GL bucket. Final-account losses on completed projects that weren't visible during the build because cost-to-complete was never recalibrated monthly. We see operators recover $40k to $150k per quarter once we install proper job-cost discipline in the first 90 days of an engagement. That's not unusual — it's the typical first-quarter finding.

This guide is the practitioner version of what we install. Not the standard. Not the theory. What to actually book on Monday morning when you're running 4-12 projects, dealing with the head contractor, the bank, the auditor, and the founder all at once. Written by a CPA who runs the finance function for AU construction operators between $2M and $50M+ in revenue.

If you read one section, make it the retention treatment one. That's where most operators lose audit defensibility.

What changed with AASB 15 — and why most pre-2018 advice is wrong now

AASB 15 Revenue from Contracts with Customers replaced AASB 111 Construction Contracts on 1 January 2018 in Australia. Most public companies adopted it then; private builders adopted it as required for periods beginning on or after 1 January 2019.

The shift was big. AASB 111 was a construction-specific standard built around percentage-of-completion. AASB 15 is a single, principles-based standard that applies to every revenue-generating contract in every industry — construction, consulting, software, retail. The principle: revenue is recognised when (or as) control of a good or service transfers to the customer.

For most construction contracts in Australia, the practical effect is that percentage-of-completion is still alive — but the justification has changed. You're no longer recognising revenue because the contract is X% complete (an AASB 111 framing). You're recognising revenue because the customer is receiving and consuming the benefits of your performance as you perform — which makes your work an "over time" performance obligation under AASB 15.

The implications:

Pre-2018 advice you may still be following is technically wrong. "Recognise revenue at the percentage of cost incurred" used to be enough. Now the test is whether your performance obligation is satisfied over time and what method (input or output) best depicts the transfer of control.
The accounting policy memo is mandatory. Your auditor will ask for your AASB 15 accounting policy in writing. If you don't have one, you're flagging a gap before the first sample is even pulled.
Documentation requirements increased. Variations, dayworks, claims, contract modifications — all need to be tracked and tested against the AASB 15 criteria for "modification" vs "new contract".
Disclosure expanded. Contract balances, transaction price allocated to remaining performance obligations, significant judgements — all newly disclosable.

For a builder who hasn't refreshed their accounting since 2017, the gap is significant. Most of what's in the books still "works" but the basis is no longer defensible.

The 5-step AASB 15 model applied to construction

The standard works through five sequential steps. Most construction operators get to step 3 confidently and start improvising from there. The improvising is where audit findings show up.

Step 1 — Identify the contract

A contract under AASB 15 requires: approval and commitment from both parties, identifiable rights, identifiable payment terms, commercial substance, and probable collection of consideration.

For construction, this is almost always the head contract (and any signed variation orders). It's worth confirming each contract you're recognising against has the five elements documented — particularly "probable collection of consideration", which the standard treats as a meaningful test.

Step 2 — Identify the performance obligations

A performance obligation is a promise to transfer a distinct good or service. The key word is "distinct" — meaning the customer can benefit from it on its own or together with other readily available resources, AND it's separately identifiable from other promises in the contract.

For most construction contracts, the entire build is a single performance obligation — not separately distinct because the customer is buying an integrated outcome (the completed building). This drives "over time" recognition.

Where construction contracts contain genuinely distinct deliverables — say, a design-only phase followed by a build phase that could be separately contracted — they may have multiple performance obligations. Worth checking, particularly on design-and-construct contracts.

Step 3 — Determine the transaction price

The transaction price is the consideration the entity expects to be entitled to. This includes variable consideration (variations, claims, bonuses, liquidated damages) — with constraint applied so that revenue isn't recognised if it's highly probable that a significant reversal would occur.

The practical implication: you can recognise some variation revenue before formal approval, but you must apply the constraint test. Most builders we onboard don't constrain enough — they recognise full variation value the moment ops marks it complete, regardless of whether the customer has even responded.

Step 4 — Allocate the transaction price

If there's one performance obligation, all transaction price goes there. If multiple, allocate based on stand-alone selling prices. For most construction, this step is trivial because there's one performance obligation.

Step 5 — Recognise revenue when (or as) each performance obligation is satisfied

For construction's typical over-time recognition, this means recognising revenue progressively as work is performed. Two methods are allowed:

Output method — measure progress by units delivered, milestones achieved, or surveys of work performed. Often cleaner but harder to apply to lumpy construction phases.
Input method — measure progress by inputs consumed (cost-to-cost is the most common). Easier to apply with a job-cost system, but vulnerable to inefficiencies (you'd recognise revenue for waste).

Most AU builders use the cost-to-cost input method. It's accepted by auditors when applied with proper cost-to-complete estimation and reasonable estimates of total cost.

Progress claim accounting — the recognition timing trap

This is the single most common error we find at onboarding. Operators recognise revenue when the progress claim invoice goes out, often days or weeks after the underlying work was performed.

That's wrong under AASB 15.

Revenue is recognised when the performance obligation is satisfied — not when the invoice is raised. For a construction contract on cost-to-cost input method, that means month-end accruals are required to recognise revenue for work performed in the period regardless of whether progress claims have been issued.

Worked example — $5M commercial fitout, mid-build

Contract value: $5,000,000 (ex GST)
Estimated total cost at completion: $4,000,000
Costs incurred to end of March: $1,600,000 (40% of total)
Expected gross margin: 20% (matches budget)
Progress claim raised 5 April for $1,900,000 (covering work to 31 March)

Revenue recognition at 31 March (period end):

Percentage of completion = $1,600,000 / $4,000,000 = 40%Revenue to recognise at 31 March = 40% × $5,000,000 = $2,000,000Costs recognised = $1,600,000 (all incurred to date)Gross margin to date = $400,000 (= 20% × $2,000,000)

Journal at 31 March:

Dr  Contract asset (unbilled revenue)     $2,000,000
    Cr  Construction revenue                       $2,000,000

Dr  Construction cost of sales            $1,600,000
    Cr  WIP / project costs                        $1,600,000

The progress claim raised on 5 April moves the unbilled revenue to a receivable:

Dr  Trade receivables                     $1,900,000
    Cr  Contract asset (unbilled revenue)          $1,900,000

The $100,000 difference ($2,000,000 recognised – $1,900,000 invoiced) stays in the contract asset and clears against the next progress claim.

Output vs input method choice

The cost-to-cost input method works for almost every AU construction operator with a functioning job-cost system. If your job-cost data is unreliable or material costs swing badly relative to plan, the output method (units delivered, milestones met, survey of work) may be cleaner.

In practice we recommend input cost-to-cost for ~95% of clients. Output method requires defensible measurement criteria that most builders don't have in their existing systems.

Retention treatment under AASB 15 — what the standard actually requires

Retention is money the head contractor withholds from progress claims to ensure defect rectification. Typically 5% of each claim, released in halves at practical completion and end-of-defects-liability-period.

The pre-2018 treatment was simple: retention sits in trade receivables, you wait, you collect. Under AASB 15, that's wrong.

Retention is not trade receivable — it's a contract asset (or part of one). The standard distinguishes between receivables (unconditional right to consideration) and contract assets (conditional right). Retention is a conditional right — the head contractor isn't required to pay until you've satisfied defects rectification and reached the release milestone. That's a conditional right by definition.

The accounting

Each progress claim has revenue and retention components separated at recognition:

Recognised revenue: 100% of work performed
Receivable portion: 95% of recognised revenue (the part you can invoice now)
Contract asset (retention): 5% of recognised revenue (the part conditional on defects rectification)

Worked example — same $5M fitout, focused on retention

At 31 March, $2,000,000 of revenue recognised. 5% standard retention means:

$1,900,000 progress claim raised (receivable)
$100,000 retention held (contract asset)

Journals at 31 March:

Dr  Trade receivables (progress claim AR)  $1,900,000
Dr  Retention asset (contract asset)         $100,000
    Cr  Construction revenue                        $2,000,000

When practical completion is reached and 50% of retention becomes collectible:

Dr  Trade receivables (retention release)    $50,000
    Cr  Retention asset                              $50,000

The remaining $50,000 stays in retention asset until end of defects liability period, then clears via the same cycle.

The GST trap (a painful one)

GST on retention is the trap most AU builders hate. The GST is payable at the time of the underlying supply, which is when revenue is recognised — not when retention is paid.

So in the example above, you owe the ATO 10% GST on the full $2,000,000 ($200,000) at the BAS for the period the revenue was recognised, even though you've only received cash for $1,900,000 plus GST = $2,090,000 inclusive. The $100,000 retention (plus its associated $10,000 of GST) you've also already remitted to the ATO — out of cash you haven't collected.

This is per A New Tax System (Goods and Services Tax) Act 1999 and is the established ATO position. The pain is real. The cash flow planning has to account for it.

Practical implications:

Cash forecasting must model retention separately. A 13-week cash forecast that lumps retention into general AR is going to overstate available cash. Treat retention release dates as conditional inflows; budget the GST outflow at recognition date.
Bank covenant reporting must disclose retention. Most working capital ratios should net retention assets out, because their cash conversion is conditional on milestones not yet met.
Disclosure under AASB 15. Your financial statements need to disclose contract asset balances separately from receivables. The auditor will ask.

Variations and dayworks — the largest hidden revenue leakage in AU construction

Approved variations that never get invoiced are the most common single finding in our first-quarter engagements. Total: typically $40,000–$150,000 in unbilled work sitting in the gap between "operations marked complete" and "finance sent the invoice."

Definitions matter

Variation — a change to the contract scope, formally approved by the head contractor (or principal), with agreed pricing. Almost always covered by the head contract's variation clause and follows a defined approval workflow.
Daywork — work performed at the head contractor's instruction outside normal contract scope, billed at agreed time-and-materials rates. Less formal pricing but still part of the contract.
Claim — work performed under disputed circumstances (e.g., latent conditions, scope creep, head contractor delays) for which you're seeking compensation but where entitlement is contested.

These three have different accounting treatments because they have different probability profiles for the AASB 15 constraint test.

AASB 15 treatment

Variations and dayworks with formal approval and agreed pricing are contract modifications under AASB 15. Two paths:

If the variation adds distinct goods/services AT a price reflecting standalone selling price → treat as a separate contract.
Otherwise → treat as a modification to the existing contract, with a catch-up adjustment to revenue.

In construction, almost all variations fall into the second bucket because they're integrated with the original scope.

Claims (disputed work) sit on the variable consideration side of step 3. Apply the constraint test rigorously — recognise only the amount it's "highly probable" won't reverse. Most claims should be recognised at materially below the full claimed amount until contractual resolution.

Worked example — daywork accrual

Two crew on site 3 May performing rectification at the head contractor's instruction. Agreed daywork rate: $1,200/day per crew. Time on site: 2 days. Total: $4,800.

Daywork sheet signed by head contractor's site rep on 3 May. Invoice not raised until 12 May.

Correct journal at 31 March (assuming this happened in March):

Dr  Contract asset (unbilled daywork)        $4,800
    Cr  Daywork revenue                              $4,800

When invoiced:

Dr  Trade receivables                        $4,800
    Cr  Contract asset                               $4,800

The mistake most builders make: book daywork only when the invoice goes out, often weeks after the work was performed. Over months, an active project with regular daywork accumulates a meaningful unrecognised revenue position.

The variation register

The single most leverageable artefact for closing this gap is a variation register — a living spreadsheet (or proper job-cost system) tracking every variation by:

VOC (Variation Order Confirmation) number
Date raised
Description + value
Approval status (approved / pending / disputed)
Date approved
Date invoiced
Date paid

Monthly reconciliation: any line in "approved" status that hasn't been invoiced within 30 days is escalated to finance. Any line still in "pending" status after 60 days is escalated to commercial.

Once this register exists and gets a monthly reconciliation, the unbilled-variation leakage closes within a quarter. Without it, the leakage is permanent.

WIP accounting and month-end recognition

WIP — Work in Progress — is the bridge between cost incurred and revenue recognised. It's where unbilled work sits, where the cost-to-complete estimation lives, and where most of the audit work focuses at year-end.

WIP definition

In construction accounting, WIP typically refers to:

Costs incurred on active projects not yet recognised as cost-of-sales
Plus the corresponding unbilled revenue (the contract asset)
Minus any over-billing position (billings in excess of revenue recognised — a contract liability)

Different builders define WIP slightly differently. The key is internal consistency and disclosure clarity.

Month-end WIP reconciliation process

This is a process we install in every client engagement during the first 60 days. The cadence: every project, every month, reconciled against the active register.

Pull project register. Active projects with: contract value, costs incurred to date, costs forecast to completion, percentage of completion calculated.
Recalibrate cost-to-complete. Project managers re-estimate remaining cost to complete based on current state. This is the input that drives accurate revenue recognition — bad estimates equal bad recognition.
Calculate revenue to recognise. For each project: (costs incurred / forecast total cost) × contract value = revenue earned to date. Less revenue previously recognised = revenue to recognise this period.
Reconcile to billings. Compare revenue recognised to billings raised. If billings > revenue recognised → contract liability (over-billed). If billings < revenue recognised → contract asset (under-billed / unbilled revenue).
Apply retention split. As covered earlier — receivable + retention asset.
Post journals.
Document the cost-to-complete estimates. The auditor will sample these — particularly on projects that closed at a loss the next year.

When WIP becomes problematic

Two patterns to watch:

Persistent over-billing — billings consistently ahead of revenue recognition. May indicate the contract is profitable upfront (early-billed milestones) and back-end-loaded with costs. Or it may indicate aggressive billing relative to actual work performed.
Persistent under-billing — revenue recognition ahead of billings. May indicate slow billing cycles (the unbilled-variation problem) or genuinely large unbilled accruals at month-end.

A healthy WIP profile across multiple active projects shows oscillation around a small net contract asset / liability position. Persistent extremes in either direction warrant investigation.

Job cost reporting — the operating layer that makes the books defensible

Accurate AASB 15 recognition depends on accurate job-cost data. If your job-cost system is broken, your revenue numbers are broken. Period.

What the active project register needs to track

Per project:

Bid value (original contract)
Approved variations (running total)
Dayworks accrued but not yet invoiced (running)
Cost incurred to date (from GL, by category — labour / materials / subcontract / plant / overheads allocated)
Cost-to-complete estimate (refreshed monthly by project manager)
Forecast final cost (incurred + remaining)
Forecast margin at completion (revenue – forecast final cost)
Current variance from bid margin (forecast margin vs original bid margin)

Cadence

Daily — cost capture (Xero or Procore or whichever ERP is in use)
Weekly — daywork sheets reconciled; subcontract invoices coded; labour time-sheeted
Monthly — cost-to-complete refresh by project manager; project register updated; finance reconciles to GL; revenue recognition journals posted
Quarterly — variance commentary on projects with margin shift >2 percentage points

The reporting layer

A useful monthly construction management pack contains:

Project register snapshot (the one-pager above for every active project)
Margin distribution chart — see which projects are pulling vs dragging
Revenue recognition reconciliation (contract assets and liabilities)
13-week cash forecast with retention release windows highlighted
Bank covenant tracker (current vs trailing 12 months, projected next 12)
AR aging (30/60/90 buckets, with notes on disputed amounts)

This is what we install at Financial Controller tier ($4,950/month) — and what most banks expect to see when reviewing a facility renewal.

Subcontractor and head-contractor treatment

Construction businesses act as both head contractor and subcontractor depending on the contract. The accounting works similarly in both directions but with mirror-image GL impacts.

As head contractor (you employ subcontractors)

Subcontract costs are recognised when the subcontractor's underlying performance obligation is satisfied — same AASB 15 principle.
Subcontractor invoices are matched against work performed; differences accrued/deferred at month-end.
Retention you hold (against the subcontractor) is the mirror of retention held against you — it's a contract liability from the subcontractor's perspective, but a reduction of liability on your books until release milestones are met.
PAYG vs ABN classification for individuals is determined by the ATO's contractor tests. Genuine subcontractors with their own ABN, multiple clients, and project-defined deliverables sit outside payroll. Workers who function as employees in all but name (paid hourly, single client, controlled hours, supervised) should be on PAYG regardless of any ABN they hold. Get this wrong and you face superannuation guarantee back-payments plus penalties.

As subcontractor (you're employed by a head contractor)

Same AASB 15 framework as covered above, but you're now the supplier of services.
Retention is held against you — the contract asset / receivable split applies on your side.
Back-charges from the head contractor for defects or rework are revenue reductions (not separate expenses) if they relate to the original performance obligation.

Sub-account discipline

The chart of accounts should sub-account by contract type. At minimum:

Head-contract revenue / cost of sales
Subcontract revenue / cost of sales (where you're sub-contracted)
Variation revenue / cost of sales
Daywork revenue / cost of sales
Retention held by us (sub-contractor retention) — separate liability
Retention held against us — separate contract asset

This is what makes month-end close clean and audit defence credible.

GST traps in construction

Construction is one of the GST-most-painful industries in Australia. Five traps to know.

1. GST on retention is payable at supply, not at cash receipt

Covered earlier. Pay it from the BAS that follows the period the underlying revenue was recognised, regardless of whether retention has been released. Cash flow planning must include this.

2. GST on dayworks is payable at performance, not invoicing

Same principle. If daywork is performed in March and invoiced in May, GST sits on the March BAS — not May's. Most builders get this wrong if their accruals aren't disciplined.

3. GST on variations follows the variation's recognition

If variation revenue is recognised in March (per AASB 15) but invoiced in April (per the head contract's variation invoicing terms), GST sits on March's BAS.

4. Margin scheme on land

If you're a developer selling residential property where the land was acquired pre-2000 (no GST in cost base), the margin scheme may apply. Different GST calculation, different documentation requirements. Easy to get wrong without a margin-scheme-specific review.

5. Tax invoice timing

Tax invoices must be issued within 28 days of a written request from the recipient. Most progress claims become tax invoices on issue, but disputed claims, retention release notices, and back-charge debits all have separate tax invoice handling. The ATO publishes guidance on construction-specific tax invoice timing — worth reviewing if you've had GST issues.

Practical fix

The fix for all five traps is the same: monthly close discipline with GST-aware journals. Don't wait for BAS quarter-end. Recognise revenue + GST + retention split + variation accruals at month-end every month. The BAS then reconciles trivially.

Bank covenant reporting for construction operators

Construction businesses live or die on bank facilities — overdraft, project finance, equipment loans, performance bonds. The bank's risk assessment is shaped almost entirely by what they read in your monthly management pack.

Common covenants

Working capital ratio — current assets / current liabilities. Construction-specific concern: retention assets often get counted as current assets despite being conditional. Banks may net retention out for covenant testing.
Debt service coverage ratio — (EBITDA + non-cash adjustments) / debt service. Construction concern: lumpy EBITDA from large-project recognition.
EBITDA covenant — trailing 12-month EBITDA above a floor. Watch for accruals that boost short-term EBITDA without matching cash flow.
Single-contract concentration — no single contract more than X% of revenue. Multi-project portfolio test.
Forward order book — minimum dollar value of contracted forward work.

What banks actually read

In our experience the bank's relationship manager spends real time on three things:

Margin trend by project — are the projects you took on six months ago still tracking to their bid margins?
13-week cash forecast — does the forward cash position support the existing facility headroom?
Forward order book mix — are you concentrated on a single head contractor, or diversified?

A management pack that surfaces these three clearly will pass a covenant review without drama. A management pack that buries them is going to trigger questions you don't want during a renewal.

The bank narrative

When a bank issues a covenant test or renewal review, send a one-page bank narrative attached to the pack. Cover:

Trading update for the period
Key project margin trends (highlight any deteriorations + explanation)
Cash position vs minimum-line + 13-week outlook
Single-contract concentration
Forward order book
Any covenant breach risk + mitigation plan

This is the kind of front-running communication that keeps facilities renewing on standard terms instead of triggering reviews.

Six common construction accounting mistakes (and how to fix each)

Mistake 1 — Recognising revenue on invoice date

Why it fails: AASB 15 requires recognition when the performance obligation is satisfied, not when the invoice is raised.Fix: Month-end revenue recognition journal based on cost-to-cost percentage of completion, with the unbilled portion sitting in contract asset until invoiced.

Mistake 2 — Paying GST on net (cash) instead of gross (recognised) revenue

Why it fails: GST is payable on the value of the supply, calculated at the time of supply — not at the time of cash receipt. Retention and unbilled variations both trigger GST liability before the cash arrives.Fix: Monthly GST accrual at the time revenue is recognised. Cash flow planning treats GST on unbilled revenue as a future outflow.

Mistake 3 — No variation register

Why it fails: Variations and dayworks slip through the gap between operations and finance, accumulating as unbilled revenue that may never get collected.Fix: Living variation register with monthly reconciliation. Every "approved" status line aged >30 days without invoice escalates to finance.

Mistake 4 — Missing or stale WIP reconciliation

Why it fails: Cost-to-complete estimates that aren't refreshed monthly mean revenue recognition gets stuck at outdated percentages. Year-end finds the gap and triggers prior-period adjustments.Fix: Monthly cost-to-complete refresh by project manager, signed off by commercial lead, reconciled by finance. Documented in the project file.

Mistake 5 — Subcontractor classification (ABN vs PAYG)

Why it fails: Workers with ABNs paid as contractors but functioning as employees trigger superannuation guarantee back-payment liability + penalties. The ATO is increasingly active in this space.Fix: Annual review of every contractor against the ATO's contractor classification tests. Where in doubt, treat as PAYG and pay super.

Mistake 6 — No bank narrative when the bank asks

Why it fails: Bank facility reviews come with questions that need answering in 24-48 hours. Operators without a prepared narrative end up either delaying or sending unstructured data dumps that raise more questions.Fix: Standing one-page bank narrative template, updated monthly with the management pack. Ready to send the moment a facility review request lands.

When to bring in a specialist

A bookkeeper can run progress claim invoicing and BAS lodgement if they're given a clean chart of accounts and a defined process. The CPA-led work is:

Setting up the chart of accounts so revenue, cost-of-sales, contract assets, contract liabilities, retention, and variations are sub-accounted correctly from the start.
Writing the AASB 15 accounting policy memo that the auditor will ask for — covering performance obligation identification, variable consideration constraint, and method choice (input vs output).
Monthly WIP reconciliation — the cost-to-complete refresh, revenue recognition journals, contract asset / liability reconciliation.
Bank narrative production monthly with the management pack.
Annual policy review when the project portfolio changes materially (new client types, new contract structures, multi-state operations).

For most operators, the trigger to engage is one of:

Three or more concurrent projects without clean job-cost reporting against the active register.
Bank facility review approaching with management reporting that won't pass scrutiny.
Material unbilled-variation leakage suspected but never quantified.
Year-end audit finding flagged retention treatment or contract asset / liability concerns.

We work with AU construction operators between $2M and $50M+ in revenue across three engagement tiers:

Finance Manager — from $2,750/mo. Sub-$5M operators. Monthly close, BAS, payroll oversight, AR/AP rhythm.
Financial Controller — from $4,950/mo. $5M–$25M operators. Adds job-cost reporting, 13-week cash forecast, bank narrative, Power BI dashboard, AASB 15 retention treatment.
Head of Finance — from $8,500/mo. $25M+ operators or capital-event-driven scope. Adds capital structure modelling, board-grade reporting, capital raise preparation, M&A support.

The Finance Function Maturity Audit at TechEdge takes five minutes — twelve questions, self-scored, one-page tier recommendation back within 48 hours.

TL;DR for the busy founder

AASB 15 replaced AASB 111 in 2018. Most pre-2018 advice is no longer defensible.
Recognise revenue at performance obligation satisfaction (month-end accrual on cost-to-cost), not at invoice date.
Split each progress claim into receivable (95%) and retention asset (5%). They're different things under AASB 15.
GST on retention is payable at supply, not at cash receipt. Plan for it.
Variations and dayworks need a living register and monthly reconciliation. Unbilled-variation leakage is typically $40k–$150k per quarter without it.
Cost-to-complete refresh monthly. Stale estimates equal bad recognition.
Bank covenant reporting starts with margin-by-project and a 13-week cash forecast. Bury those and you trigger reviews.
ABN-vs-PAYG contractor classification is an ATO active-enforcement area. Review annually.