Unapproved variations and claims: revenue or not yet?
When a contractor can count a variation the client has not yet priced or approved, or a claim still in dispute, as revenue, and what evidence supports it.
By Achekam · · 5 min read · For Construction businesses in South Africa, Nigeria, Kenya
Halfway through a warehouse job, the client's engineer issues a site instruction: deeper foundations on one side, because of what the excavation found. The contractor does the work. The quantity surveyor says the variation will be valued "in the final account". Meanwhile the contractor is preparing a separate claim for the weeks lost while waiting for the revised drawings, which the client's side says were the contractor's own fault.
At month end, the contractor's management accounts face a choice. The extra foundations cost real money, already spent. The delay claim, if it succeeds, would cover real losses. Should either appear as revenue now, before the client agrees? Counting too much makes the job look profitable until the final account collapses; counting nothing makes it look like a loss that may never happen.
Three different positions
Not every unagreed amount is the same. Separate them before deciding anything:
| Position | Example | How certain is the right to be paid? |
|---|---|---|
| Approved and priced | A signed variation order with an agreed rate | As certain as the original contract |
| Approved but unpriced | A written site instruction, value still to be agreed | The work is authorised; only the amount is open |
| Disputed claim | A delay or disruption claim the client rejects | Neither the right nor the amount is agreed |
The accounting answer differs for each, and mixing them in one "variations" line is where problems start.
Is the change enforceable?
ACCA explains that under IFRS 15 a contract may be written, verbal or implied, but it must be enforceable, have commercial substance and be approved by the parties, and it must be probable that the entity will collect the consideration. ACCA works through these conditions and the treatment of uncertain amounts in its article revisiting IFRS 15.
A variation changes the contract, so the same questions apply to the change itself. A signed variation order clearly passes. A written instruction from someone the contract authorises to vary the works may well give an enforceable right to be paid something, even if the amount is not settled, though the contract's terms decide. A claim the client disputes in principle may not yet be an enforceable change at all, until it is accepted, decided by an adjudicator or settled.
Where the contract's own variation clause sets out who may instruct changes and how they are valued, that clause is the starting point. Ask your accountant, and if necessary your quantity surveyor or lawyer, to read it with you.
Estimating what you expect to be paid
Once a change is enforceable but its value is open, IFRS 15's rule on variable amounts applies. IFRS 15 requires revenue in an amount that reflects the consideration the entity expects to be entitled to, and where the consideration includes a variable amount, the entity must estimate it.
ACCA explains that the estimate is made using either the expected value or the most likely amount, and that it is included only to the extent that it is highly probable that a significant reversal of revenue will not occur.
For an approved but unpriced variation, the contractor can often estimate with some confidence: the contract's rates, or rates for similar work, give a basis, and the client's quantity surveyor has accepted the work was instructed. The constraint may still trim the estimate to the part the contractor is confident will be agreed.
For a disputed claim, the "highly probable" test is a much higher bar. Until there is a ruling, an acceptance or a settlement, the honest answer is often that little or nothing can be counted.
Evidence behind the estimate
Your accountant, and any auditor, will want to see why the estimate is reasonable. Keep, for each variation and claim:
- The written instruction, and who gave it.
- Site meeting minutes recording the change.
- Drawings or specifications before and after.
- Your pricing, based on contract rates where possible.
- Correspondence with the quantity surveyor about value.
- Any payment certificate that includes the variation, even in part.
A variation that exists only as a verbal request from the site agent, with no confirmation in writing, is weak evidence for revenue and weak evidence in the final account. Confirm verbal instructions in writing the same day.
Invoice what is agreed; journal what is estimated
In Achekam, issuing an invoice takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT. Issue invoices only for amounts the client has agreed or that a payment certificate includes. Invoicing an amount the client has not accepted creates a debt it will not pay, and a credit note later.
Where your accountant agrees that part of an unpriced variation should be recognised before it can be invoiced, post it as a manual journal into an account for revenue earned but not yet invoiced, and reverse it when the agreed amount is invoiced. Achekam refuses a journal that does not balance or is dated in a closed month, and a posted journal is corrected only by reversing it, so each estimate and its reversal are on the record.
Receivables are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. Because only agreed amounts are invoiced, the ageing shows what the client actually owes, and the estimates sit separately where everyone can see they are estimates.
Revisit it as the final account is negotiated
Estimates on variations and claims are not set once. Each month until the final account is agreed:
- Update the value of each unpriced variation as the quantity surveyor responds.
- Move agreed amounts from the estimate to an invoice.
- Reduce or remove estimates the client has firmly rejected.
- Add recognition for a claim only when it is accepted, ruled on or settled.
When the final account is signed, every estimate should have become either an invoice or nothing.
Separate the three positions this month
List every open variation and claim on each job, put each one in the right column of the table, and agree with your accountant what can be counted. For the paperwork that wins variations, see site instructions as evidence, and for the end of the job, reconciling the final account.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
