A CPA for Contracting Companies: Classification, Guarantees and Long-Term Contracts

Contract accounting is not commercial accounting on a longer timeline. We audit your statements with the classification grade and the tender file in view, and get revenue recognition, retentions and variation orders right.

Why contract accounting is different

A single project spans more than one financial year, so revenue moves with progress rather than with the invoice, and the statements carry items that do not exist in a trading business: work in progress, unbilled receivables, retentions released after final handover, advance payments against bank guarantees, and variation orders and claims not yet determined.

Those are exactly the items three parties read at the same time: the classification agency, which assesses your financial capability from your statements (Article 6 of the Contractors Classification Law); the bank, which issues your guarantees and sets your facility limit; and the employer, which measures your adherence to the programme. A misclassified retention or a misdated revenue entry does not stay an accounting error; it costs a classification grade or closes a facility.

What the law requires of a contracting company

  • Classification is a condition of award: government entities may not award or accept any bid for a project subject to classification unless the contractor is classified in the field, activity and grade concerned (Article 3 of the Contractors Classification Law), and financial capability is assessed from the financial statements (Article 6).
  • Joint ventures: each joint contractor must be classified in the project’s field, at least one of them in the required grade, and the others in the same grade or one grade below it at most (Article 9).
  • A change in your legal position — conversion, a new partner, a merger — requires an application to amend the classification certificate (Article 10).
  • Guarantees consume your liquidity: an initial guarantee of 1% to 2% of the bid value (Article 41 of the Government Tenders and Procurement Law), a final guarantee of 5% of the contract value within 15 working days of award (Article 61), and an advance payment against a bank guarantee equal to it (Article 66).
  • Extension of time and relief from delay damages are available in defined cases, including additional works, delay attributable to the government entity, and suspension ordered by it (Article 74) — and proving those financially is what decides the claim.
  • Local content enters the evaluation of your financial bid and is computed with defined weights and ratios.
  • Statements and audit: financial statements are prepared under the approved standards and filed within six months of the year-end (Article 17 of the Companies Law), and the partners appoint a licensed auditor (Article 18) unless the company falls within the exemption (Article 19) — and the exemption does not remove the audited statements that classification or the bank will ask for.

How we help contracting companies

  • Auditing the financial statements with an understanding of the contracts: revenue recognised over time, estimates of cost to complete, and provisions for expected losses, within our external audit service.
  • The financial capability file for classification: reading the financial thresholds of the target grade and fixing what depresses the score before filing, within our contractor classification service.
  • Project-level bookkeeping: a cost centre per contract, payment certificates tied to the entries, and retentions and advances kept separate, within our accounting and bookkeeping service.
  • The local content certificate and the computation of the percentage from your own records, within our local content service.
  • Quantifying claims and delay in disputes and arbitration, with a documentary report that withstands the expert and the court, within our litigation support reports service.

Frequently asked questions

Does classification require statements audited by a CPA?
Financial capability is assessed from the financial statements under Article 6, and the regulations require the latest year’s statement of financial position and income statement to be certified by a licensed CPA.

My project has not been handed over yet. When do I recognise revenue?
In construction contracts revenue is normally recognised over time by reference to progress measured on a reliable basis, not on final handover and not on collection of the payment certificate. The method chosen and its measurement basis must be documented and applied consistently.

How should retentions appear in the statements?
As receivables disclosed separately with their expected timing. Classifying them wrongly as current or non-current changes the liquidity ratios on which classification and bank facilities are built.

I have variation orders and claims not yet approved. Do they go into revenue?
Only to the extent that a significant reversal is not expected and the amount can be measured reliably. Including an unapproved claim weakens the auditor’s report and damages your credibility with the agency and the bank.

Related detailed guides

Your classification grade is read out of your statements, and the statements are built from a whole year of books, not from the week before filing. Start with us early.