AS 7 Construction Contracts explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
AS 7 tells a contractor how to record revenue, cost and profit on a contract that runs across more than one year. Revenue and cost are recognised as the work is done, not when the contract is finished and not when the customer pays, and a loss on the whole contract is recognised the moment it is expected. The standard is for contractors and applies to roads, buildings, plant and similar work. The accounts built on it are part of the work of our books of accounts and compliance team for contractors.
Accounting Standards as on 1 April 2025 (ICAI compendium), read with the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026. Later amendments should be checked on icai.org and mca.gov.in. Companies on Ind AS follow Ind AS 115; see our Ind AS 115 guide. A real estate developer selling its own units should check which guidance applies, as paragraph 1 applies the standard to contractors.
When the outcome of a contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion at the reporting date (paragraph 21). When it is probable that total costs will exceed total revenue, the expected loss is recognised as an expense immediately, whatever the stage of completion (paragraphs 35 and 36). Changes in estimates are applied cumulatively as changes in accounting estimate (paragraph 37). Where the outcome cannot be estimated reliably, revenue is recognised only up to costs expected to be recovered and no profit is taken (paragraphs 31 and 32).
What the standard requires
| Paragraphs | What it requires | What it means in the books |
|---|---|---|
| 2.2, 2.3 | A fixed price contract agrees a fixed price or a fixed rate per unit; a cost plus contract reimburses allowable costs plus a percentage or fixed fee | Classify the contract first |
| 6-9 | Apply the standard to each contract; treat the separately negotiated assets in one contract separately, and a package of closely related contracts together | Decide the unit of account |
| 10-14 | Revenue is the agreed amount plus variations, claims and incentives, to the extent probable and measurable | Do not book claims until negotiations are advanced |
| 15-20 | Costs include those directly related to the contract, those allocable to contract activity in general, and those chargeable to the customer; general administration and selling costs not reimbursed are excluded | Keep a cost sheet for each contract |
| 21, 22, 23 | Fixed price: four conditions for reliable estimate; cost plus: two conditions | Test before using percentage of completion |
| 29, 30 | Stage of completion by costs to total cost, by survey or by physical proportion; costs for future activity, such as materials not yet used, are excluded from costs incurred | Cost method uses work-done costs only |
| 31-34 | If the outcome cannot be estimated reliably, revenue equals recoverable costs incurred and no profit | Revert to paragraph 21 once the uncertainty goes |
| 35, 36 | Expected loss is recognised at once, regardless of stage or profit on other contracts | Provide for the whole loss |
| 41-43 | Present the gross amount due from customers as an asset and the gross amount due to customers as a liability | Net by contract |
Method
- Fix revenue (agreed price plus probable, measurable variations) and estimate total cost.
- Compute the stage of completion: costs incurred for work done to date divided by total estimated cost.
- Cumulative revenue is that percentage of total revenue; revenue for the year is the cumulative figure less revenue of earlier years.
- Costs of the year are normally recognised as incurred.
- Re-estimate at each year end; the percentage is applied to the current estimates on a cumulative basis (paragraph 37).
- If total estimated cost now exceeds total revenue, recognise the whole loss at once.
- Present the amount due from or to customers.
Worked example: Naresh Infra Works, a road contract
The entity and all figures in this example are invented for illustration.
Naresh Infra Works signs a fixed price road contract for 50,00,000 on 1 April. All costs incurred relate to work done. Progress billings are 14,00,000 in year 1, 11,00,000 in year 2 and 25,00,000 in year 3.
| Working | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Cost incurred in the year | 12,00,000 | 16,00,000 | 28,00,000 |
| Cumulative cost incurred | 12,00,000 | 28,00,000 | 56,00,000 |
| Estimated cost to complete | 28,00,000 | 28,00,000 | nil |
| Estimated total cost | 40,00,000 | 56,00,000 | 56,00,000 |
| Stage of completion (cumulative cost / total cost) | 30 per cent | 50 per cent | 100 per cent |
| Cumulative revenue (stage x 50,00,000) | 15,00,000 | 25,00,000 | 50,00,000 |
| Revenue for the year | 15,00,000 | 10,00,000 | 25,00,000 |
| Cost recognised in the year | 12,00,000 | 16,00,000 | 28,00,000 |
| Profit or (loss) before provision | 3,00,000 | (6,00,000) | (3,00,000) |
In year 1 the estimated total cost of 40,00,000 is below the price, so a profit of 10,00,000 is expected and 30 per cent of it, 3,00,000, is recognised. In year 2 the estimate rises to 56,00,000, a cost overrun, so the contract is now expected to lose 6,00,000 (50,00,000 less 56,00,000). Under paragraphs 35 and 36 the whole loss is recognised now, whatever the stage.
Provision in year 2. Cumulative result before the provision: 3,00,000 profit in year 1 less 6,00,000 loss in year 2 = a loss of 3,00,000 to date. The whole expected loss is 6,00,000, so a provision of 3,00,000 is made to bring the cumulative loss to 6,00,000.
| Year | Entry | Debit | Credit |
|---|---|---|---|
| 2 | Contract costs (expense) Dr | 3,00,000 | |
| To Provision for expected loss on contract | 3,00,000 | ||
| 3 | Provision for expected loss on contract Dr | 3,00,000 | |
| To Contract costs (expense) | 3,00,000 |
| Result for the year | Year 1 | Year 2 | Year 3 | Total |
|---|---|---|---|---|
| Profit or (loss) before provision | 3,00,000 | (6,00,000) | (3,00,000) | (6,00,000) |
| Provision created or (released) | nil | (3,00,000) | 3,00,000 | nil |
| Net profit or (loss) | 3,00,000 | (9,00,000) | nil | (6,00,000) |
Amount due from or to customers (paragraphs 42 and 43).
| At the end of | Costs incurred plus recognised profits less recognised losses | Progress billings (cumulative) | Gross amount due from or (to) customers |
|---|---|---|---|
| Year 1 | 12,00,000 + 3,00,000 = 15,00,000 | 14,00,000 | 1,00,000 from customers |
| Year 2 | 28,00,000 + 3,00,000 - 9,00,000 = 22,00,000 | 25,00,000 | (3,00,000) to customers |
| Year 3 | 56,00,000 - 6,00,000 = 50,00,000 | 50,00,000 | nil |
Check. Total revenue 15,00,000 + 10,00,000 + 25,00,000 = 50,00,000, the contract price. Total cost 12,00,000 + 16,00,000 + 28,00,000 = 56,00,000. The net result over three years, 3,00,000 - 9,00,000 + nil = a loss of 6,00,000 = 50,00,000 - 56,00,000. At the end of year 2 the amount due to customers of 3,00,000 equals the provision, since revenue recognised equals billings (25,00,000).
Disclosure
| Paragraph | Disclosure |
|---|---|
| 38 | Contract revenue recognised in the period, the methods used to determine it and the methods used to determine the stage of completion |
| 39, 40 | For contracts in progress: aggregate costs incurred and recognised profits (less recognised losses), advances received and retentions |
| 41-43 | Gross amount due from customers as an asset; gross amount due to customers as a liability |
| 44 | Contingencies, such as warranty costs and penalties, under AS 4 |
Retentions are billed amounts withheld until conditions are satisfied or defects rectified; advances are amounts received before the work is done (paragraph 40). For contingencies see our guide to AS 4; for revenue generally, AS 9.
Common mistakes
- Taking revenue when bills are raised instead of by the stage of completion; billing does not show the work done (paragraph 29).
- Including materials delivered to site but not yet used in costs incurred when the stage is measured by cost (paragraph 30).
- Recognising an expected loss only in proportion to the work done, rather than in full at once.
- Booking a claim as revenue before negotiations are advanced and the amount is probable (paragraph 13).
Need help with contract accounting?
If you are a contractor and need contract-wise revenue, cost sheets and the amount due from customers worked out, our team can set up the records and prepare the accounts. See our books of accounts and compliance service and send us your contracts and cost records.
Key takeaways
- Recognise contract revenue and costs by the stage of completion when the outcome can be estimated reliably.
- A fixed price contract needs four conditions for a reliable estimate; a cost plus contract needs two.
- An expected loss is recognised in full and immediately.
- Revised estimates apply on a cumulative basis.
- Present the amount due from or to customers, with the disclosures in paragraphs 38 to 44.
Read next
- Accounting Standards in India: the list from AS 1 to AS 29
- AS 14, Accounting for Amalgamations
- AS 9 Revenue Recognition
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.