How to Account for Construction Projects in UAE | Comprehensive Guide | One Desk Solution

How to Account for Construction Projects in UAE: Complete Guide

Executive Summary: Construction accounting in the UAE requires specialized knowledge of IFRS 15, percentage of completion methods, VAT regulations, and project-based financial management. This comprehensive guide covers revenue recognition, cost allocation, compliance requirements, and best practices for construction companies operating in Dubai and across the UAE.

Understanding Construction Accounting in UAE
Key Accounting Standards (IFRS 15)
Revenue Recognition Methods
Construction Cost Accounting Structure
VAT Treatment in Construction
Job Costing Systems
Work in Progress (WIP) Tracking
Retention & Progress Payment Accounting
Contract Variations & Claims
Financial Reporting Requirements
Technology Solutions
Compliance & Audit Considerations
Best Practices
Frequently Asked Questions
Professional Assistance
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🏗️ Critical Insight: The percentage of completion method under IFRS 15 is mandatory for most construction projects in UAE. Proper implementation requires accurate cost tracking and regular project progress assessments.

Understanding Construction Accounting in UAE Context

The construction industry in the UAE is one of the most dynamic and complex sectors, driving economic growth from Dubai's skyscrapers to Abu Dhabi's infrastructure megaprojects. Construction accounting differs fundamentally from standard business accounting due to several unique characteristics that demand specialized expertise.

At One Desk Solution, we provide expert accounting, bookkeeping, and audit services specifically designed for construction companies operating in Dubai and throughout the UAE. Our team understands the complexities of project-based accounting in the region's competitive construction market.

Construction accounting faces unique challenges including long-term project durations, complex cost structures, progress-based billing, retention amounts, and multiple regulatory requirements. Each project requires separate financial tracking while complying with UAE Commercial Companies Law, IFRS standards, VAT regulations, and emerging corporate tax requirements.

Need Construction Accounting Expertise?

Our specialists provide comprehensive accounting solutions for construction projects, ensuring compliance and optimizing financial performance.

Key Accounting Standards for Construction Projects

IFRS 15: Revenue from Contracts with Customers

Since January 1, 2018, UAE construction companies must apply IFRS 15, which establishes a five-step model for revenue recognition:

Step 1: Identify the Contract

Written/oral agreement, approved by parties, identifiable payment terms, commercial substance, and probable collection.

Step 2: Identify Performance Obligations

Distinct goods or services promised to the customer, assessed separately or combined.

Step 3: Determine Transaction Price

Fixed/variable consideration, time value of money, non-cash consideration, and consideration payable to customer.

Step 4: Allocate Transaction Price

Distribution among performance obligations based on standalone selling prices.

Step 5: Recognize Revenue

When performance obligation is satisfied (over time or at a point in time) based on transfer of control.

UAE-Specific Compliance Requirements

UAE Commercial Companies Law requirements
Economic Substance Regulations (ESR) for certain entities
Corporate tax implications (9% rate effective June 2023)
VAT regulations specific to construction and real estate
Free zone accounting requirements

Revenue Recognition Methods for Construction Projects

Method 1: Over Time Recognition (Percentage of Completion)

Most UAE construction contracts satisfy performance obligations over time. Criteria include:

Customer simultaneously receives and consumes benefits
Contractor's performance creates/enhances customer-controlled asset
Asset has no alternative use with enforceable right to payment

Cost-to-Cost Method Formula

Percentage Complete = (Costs Incurred to Date ÷ Total Estimated Costs) × 100

Revenue to Recognize = (Percentage Complete × Total Contract Value) - Previously Recognized Revenue

Example: Contract: AED 10M, Estimated costs: AED 7.5M, Costs incurred: AED 3M
Percentage: 3M ÷ 7.5M = 40%
Revenue: 40% × 10M = AED 4,000,000

Method 2: Point in Time Recognition

Applies to prefabricated buildings, manufactured equipment, or turnkey projects with single handover points.

Construction Cost Accounting Structure

Direct Materials

Raw materials (cement, steel, aggregates)
Purchased components and fittings
Transportation to site
Storage and handling costs
Normal material wastage

Direct Labor

Site workers' wages and salaries
Payroll taxes and contributions
Benefits and allowances
Overtime payments
Labor accommodation costs

Subcontractor Costs

Specialized trade contractors
MEP, finishing specialists
Labor-only subcontractors
Specialist consultants
Materials supplied by subs

Equipment & Site Overheads

Equipment rental/lease charges
Owned equipment depreciation
Site office and facilities
Safety equipment and compliance
Site security costs

Cost Category	Direct/Indirect	Project Specific	Allocation Method
Site materials	Direct	Yes	Actual cost
Site labor wages	Direct	Yes	Actual cost
Subcontractor fees	Direct	Yes	Actual cost
Site equipment rental	Direct	Yes	Actual cost
Head office rent	Indirect	No	Overhead rate
CEO salary	Indirect	No	Revenue/cost basis
Project manager salary	Mixed	Depends	Time allocation
Equipment depreciation	Mixed	Depends	Usage tracking

VAT Treatment in Construction Accounting

Construction Type	VAT Rate	Input VAT Recovery	Key Criteria
Commercial Construction	5% Standard	Recoverable	Office buildings, retail centers, hotels, industrial facilities
Residential (New Buildings)	0% Zero-Rated	Fully Recoverable	First supply of new residential buildings, conversion to residential
Residential (Subsequent Sales)	Exempt	Not Recoverable	Secondary sales of residential properties
Bare Land Sales	Exempt	Not Recoverable	Sales of undeveloped land

⚠️ VAT Reverse Charge Mechanism: For imported services (foreign consultancy, design services), the UAE contractor must account for VAT under reverse charge - recording both output VAT (payable) and input VAT (recoverable).

Job Costing Systems for Construction Projects

Essential Project Cost Structure Setup

✅ Project-specific chart of accounts design
✅ Dedicated project revenue and cost codes
✅ Material, labor, subcontractor tracking systems
✅ Equipment cost allocation methodologies
✅ Overhead allocation rates and methods
✅ Progress billing and retention tracking
✅ Variation order management systems
✅ Real-time project dashboard reporting

Work in Progress (WIP) Tracking

WIP Calculation Formula: WIP = (Cumulative Costs Incurred + Recognized Profit) - Cumulative Billings

Project	Contract Value	Costs to Date	% Complete	Revenue Recognized	Billings to Date	WIP Position
Villa Project A	AED 5,000,000	AED 2,500,000	62.5%	AED 3,125,000	AED 2,800,000	Under-billed: AED 325,000
Tower B	AED 50,000,000	AED 18,000,000	40%	AED 20,000,000	AED 22,000,000	Over-billed: (AED 2,000,000)
Mall C	AED 30,000,000	AED 12,000,000	50%	AED 15,000,000	AED 15,000,000	Neutral: AED 0

Retention & Progress Payment Accounting

Retention Accounting Treatment

At Progress Billing (5% retention):
Dr. Accounts Receivable - Current: AED 950,000
Dr. Retention Receivable: AED 50,000
Cr. Contract Revenue: AED 1,000,000

Important: VAT on retention is typically recognized at initial billing stage in UAE, not when retention is released.

Contract Variations & Claims Accounting

Approved Variation Orders

Adjusted Contract Price = Original Contract + Approved Variation
Continue percentage of completion with updated figures
Include in revenue recognition calculations

Unapproved/Disputed Variations

If approval probable: Include estimated amount in contract value
If outcome uncertain: Recognize revenue only to extent of costs (zero profit)
Disclose uncertainty in financial statements
Conservative approach recommended by UAE auditors

Complex Project Accounting Solutions

Our construction accounting specialists handle complex revenue recognition, variation orders, and claims management with audit-ready documentation.

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Financial Reporting for Construction Companies

Balance Sheet Considerations

Contract Assets: Unbilled revenue (work performed > billings)
Retention Receivable: Amounts withheld by clients
Contract Liabilities: Deferred revenue (billings > work performed)
Advance from Customers: Mobilization advances not yet earned
Provisions: Onerous contracts and warranty obligations

Income Statement Presentation

Gross Profit: Critical metric (typically 15-25% in UAE construction)
Revenue Components: Contract revenue, variations, claims
Cost of Revenue: Materials, labor, subcontractors, equipment
Operating Expenses: G&A, marketing, non-project depreciation

Technology Solutions for Construction Accounting

Recommended Construction Accounting Software in UAE:

Sage 300 Construction: Comprehensive project accounting
Procore: Cloud-based with financial integration
Jonas Construction Software: Job costing and project management
CMiC: Enterprise solution for large contractors
Oracle Primavera: Scheduling integrated with financials

Compliance & Audit Considerations

Key Audit Focus Areas

✅ Revenue recognition methodology and calculations
✅ Percentage of completion accuracy
✅ Estimated costs to complete reliability
✅ Contract modifications and variations treatment
✅ Claims and disputed amounts valuation
✅ Direct vs. indirect cost classification
✅ Overhead allocation methodology
✅ Subcontractor cost verification
✅ VAT compliance and rate application
✅ Retention receivable collectability

Best Practices for Construction Project Accounting

Establish project accounting structure before commencement
Implement robust daily cost tracking systems
Maintain comprehensive project documentation
Conduct monthly project financial reviews
Separate project accounting from general accounting
Plan for VAT cash flow impact
Leverage cloud-based construction accounting technology
Engage professional construction accounting advisors

Frequently Asked Questions (FAQs)

1. What percentage of completion method is most accepted by UAE auditors?

The cost-to-cost method is most widely accepted and commonly used in UAE construction accounting. This method calculates completion percentage as (Costs Incurred to Date ÷ Total Estimated Costs). UAE auditors prefer this method because it's objective, verifiable, and aligns with IFRS 15 requirements. Maintain detailed cost records and regular estimate updates to support your calculations.

2. How do we handle VAT on residential construction projects?

For new residential buildings, the supply is zero-rated (0% VAT) under UAE VAT law. This means you charge no VAT to the customer but can recover all input VAT on construction costs. For commercial buildings or subsequent sales, standard 5% VAT applies. Proper documentation is crucial - maintain evidence of the building's residential status and first supply qualification.

3. What documentation is needed to support revenue recognition?

Essential documentation includes: (1) Signed contracts with all amendments, (2) Progress measurement reports/certificates, (3) Detailed cost records with supporting invoices, (4) Variation orders with approvals, (5) Correspondence related to claims, (6) Payment certificates, (7) Project progress photos and site diaries, (8) Monthly project review meeting minutes. Digital document management systems are highly recommended.

4. How should we account for retention amounts?

Record retention as a separate receivable asset when billing. In UAE, VAT on retention is recognized at billing stage, not when released. For accounting: Debit Accounts Receivable (current portion), Debit Retention Receivable (retention portion), Credit Contract Revenue. When retention is released: Debit Cash, Credit Retention Receivable. Maintain aging analysis and assess collectability regularly.

5. What are the corporate tax implications for construction companies?

Construction companies are subject to UAE 9% corporate tax on profits exceeding AED 375,000. Key considerations: (1) Revenue recognition timing affects taxable income, (2) Costs must be deductible under tax law, (3) Transfer pricing for related party transactions, (4) Permanent establishment risks for projects in different emirates, (5) Tax group possibilities. Engage tax specialists for compliance and planning.

Professional Construction Accounting Assistance

Accounting for construction projects in the UAE requires specialized knowledge of IFRS 15, percentage of completion methods, VAT regulations, and project-based financial management. From revenue recognition to complex VAT treatments, construction accounting demands professional expertise to ensure compliance and optimize financial performance.

One Desk Solution Construction Accounting Services

We provide comprehensive solutions for UAE construction companies:

✅ IFRS 15 revenue recognition implementation
✅ Project accounting and job costing systems
✅ Construction-specific VAT compliance
✅ WIP schedule preparation and management
✅ Audit preparation and support
✅ Corporate tax compliance for construction
✅ Software selection and implementation
✅ Monthly project financial reporting

Contact our construction accounting specialists:
+971-52 797 1228 | WhatsApp | Online Consultation

📊 Success Factor: Regular monthly project reviews are essential. Compare actual costs vs. budget, update percentage of completion calculations, review cash flow forecasts, and identify potential issues early. This proactive approach prevents surprises at year-end and during audits.

Disclaimer: This article provides general guidance on construction project accounting in the UAE. Accounting standards and regulations are subject to change, and specific circumstances require professional advice. Consult qualified accounting professionals at One Desk Solution for guidance tailored to your construction projects.