Construction · Entrepreneurs Series
Construction in Portugal:
A Guide to Contract Accounting.
This series was created to explain, in plain terms, the accounting and tax rules specific to the construction sector in Portugal. Each article covers a distinct topic to help managers and entrepreneurs make better-informed decisions.
Accounting in construction is unlike any other sector. Long projects, costs that arise at unexpected times and the need for careful planning make all the difference. This is where NCRF 19, Construction Contracts comes in, defining how to correctly recognise costs, revenue and margins so that the accounts accurately reflect the state of the project.
What is a Construction Contract?
Under NCRF 19, a construction contract is an agreement for the construction of assets such as buildings, roads, bridges, dams, ships or any combination of interrelated assets. It also covers services directly connected to the project: design, supervision, demolition and restoration.
The key criterion is that there is a common objective and work that develops over time.
When does NCRF 19 apply?
NCRF 19 applies only when the company carries out construction work for third parties. It does not apply in two specific situations:
- When the company builds to sell (NCRF 18, Inventories, applies instead);
- When the company builds for its own use (NCRF 7, Property, Plant and Equipment, applies instead).
Barcos, S.A. builds ships for sale, it follows NCRF 18. The subcontractor hired to install the electrical systems on those ships follows NCRF 19.
Why is NCRF 19 necessary?
Because in construction, projects can start in one year and only finish in another. The accounts cannot wait until the project is complete. The standard defines:
- Which costs are included in the contract;
- How and when to recognise revenue;
- How to deal with variations, claims and incentives;
- How to calculate the stage of completion.
The objective is for the accounts to reflect the work actually completed in each financial year, even if the project is still ongoing.
Types of Construction Contracts
The standard identifies three main types:
| Contract Type | Description |
|---|---|
| Fixed Price | The project has a fixed total price agreed in advance. |
| Unit Price | Payment depends on units completed (m², m³, hours, etc.). |
| Cost Plus | The client pays the actual cost of the work plus a fixed or percentage margin. |
In practice, many contracts combine features from more than one type.
When to split or combine contracts?
For accounting purposes, "one contract" does not always mean one contract. The standard sets out criteria for segmenting or combining:
| Segmentation (split) | Combination (merge) |
|---|---|
| Separate proposals were submitted for each asset. | The contracts were negotiated as a package. |
| Negotiations were conducted independently. | They form part of a single project. |
| Costs and revenue are separately identified per asset. | They are carried out simultaneously or on a continuous basis. |
Practical Example: Percentage of Completion
A company is contracted to build a warehouse for €400,000, with an initial cost estimate of €300,000.
- Costs incurred in Year N: €180,000
- Estimated costs to complete in Year N+1: €120,000
Percentage of completion = 180,000 / (180,000 + 120,000) = 60%
Revenue recognised in Year N = 400,000 × 0.60 = €240,000
| Operating Result for Year N | Amount |
|---|---|
| Recognised revenue | €240,000 |
| Total costs incurred | €180,000 |
| Gross margin | €60,000 |
Even though the project only finishes in the following year, Year N accounts correctly reflect the 60% of work completed.
Correct application of NCRF 19 requires rigorous project tracking: costs allocated per contract, updated estimates and ongoing monitoring of the percentage of completion. This is one of the areas where close accounting support has the greatest impact on the financial health of a construction company.