EPC contractors · Real estate and construction
EPC contracts with revenue that matches the work actually done
An EPC contractor's margin is fixed at the bid and lost during execution, usually in procurement and delay. We cost each contract to complete, measure progress on work actually installed, and keep guarantees, retention and damages in view. The profit reported on a contract is then profit the contract will deliver.
In one paragraph
Engineering, procurement and construction contractors deliver industrial plants, process facilities, utilities and large buildings for private and public-sector clients on lump-sum or turnkey terms. Their owners and finance heads carry design, procurement and construction risk on a fixed price. Revenue is recognised over the life of the contract. Cash, meanwhile, is tied up in advances, guarantees and retention.
Managing director or chief financial officer, often with the head of projects
The economics
How the money moves in this trade
A turnkey contract is priced once and executed over one to three years. Revenue is generally recognised over time, often on the proportion of cost incurred to total estimated cost. That makes the estimate of total cost the most important number in the business. Procurement is a large share of value: equipment ordered early, sometimes in foreign currency, and delivered to site long before it is installed. Under the revenue standard, bought-in material not yet installed is generally kept out of that measure of progress.
Cash moves through a mobilisation advance secured by a bank guarantee, milestone billing, retention held until completion and a defects period. Performance guarantees tie up bank limits. Delay triggers liquidated damages, and changes in scope become variations and claims that may take years to settle. A contract can show steady profit while its unbilled revenue, retention and claims grow into a balance the client does not agree with.
The problem
Where the numbers usually break down
Progress includes uninstalled material
Equipment delivered to site but not installed is counted as cost incurred, so revenue and margin are brought forward on work that has not been done.
Estimates at completion are not revisited
Total cost is the bid estimate adjusted occasionally, and a contract heading for a loss shows a profit until the final quarter.
Unbilled revenue ages without challenge
Revenue recognised but not yet billed builds up on contracts where milestones are disputed, and nobody tests whether the client will accept the bill.
Liquidated damages are not provided for
A contract running behind its schedule carries an exposure to damages that sits in the project manager's head and not in the accounts.
Guarantees and margin money are tracked by the bank, not by the contractor
Advance and performance guarantees, their expiry dates, commission and the cash held as margin are reconciled only when the bank sends a statement.
What we do
The work, and the result each part produces
Contract cost to complete
Budget, commitments, cost incurred and estimate at completion for each contract, by engineering, procurement and construction package, reforecast monthly.
A loss-making contract is seen while there is time to act.
Progress measured on installed work
Material delivered but not installed separated from cost incurred, and revenue recognised on the stated measure of progress.
Reported margin reflects work actually done.
Unbilled revenue and retention ageing
Contract assets, retention and billing milestones aged by contract, with the reason each balance is unbilled recorded.
Disputed balances are surfaced before year end.
Variation, claim and damages register
Approved variations, pending claims and exposure to liquidated damages tracked by contract against the schedule.
Upside and downside on each contract sit in one place.
Guarantee and bank-limit control
Every guarantee listed with its contract, expiry, commission and margin money, and reconciled to the bank's records.
Bank limits are released when guarantees expire, not months later.
Procurement against estimate
Purchase orders compared with the bid estimate by package, including foreign-currency exposure on imported equipment.
Procurement savings and overruns are known as orders are placed.
Where we start
The first steps of an engagement
Contract files and cost ledgers
We ask for each contract and its bid estimate, the latest cost-to-complete sheet, purchase orders and site receipts, client running bills and certified measurements, and the bank's guarantee statement.
Progress test on installed work
Cost incurred is split between installed work and material lying at site. Revenue to date is recomputed on installed progress and compared with what is booked.
Monthly estimate at completion
A monthly reforecast of total cost by engineering, procurement and construction package is set up, with a register of variations, claims and damages exposure beside it.
Contract margin report
The first report shows, for each contract, estimate at completion against bid, margin on measured progress, unbilled revenue and retention, and guarantees outstanding.
How it is measured
The reports the work is judged on
Each is recorded as a baseline before the work starts, so later reports have an honest comparison.
- Estimate at completion against bid, by contract
- Revenue recognised against measured progress
- Unbilled revenue and retention, aged by contract
- Liquidated damages exposure against schedule
- Guarantees outstanding and margin money held
- Procurement cost against estimate, by package
Who it suits
Written for, and not the right fit for
- You build roads, irrigation or water works for government on item-rate contracts; our infrastructure contractors page covers that.
- You need a statutory audit, a tax-audit report or a certificate for a tender on its own; those are signed by an independently engaged CA.
- EPC and turnkey contractors delivering plants, utilities and large buildings on lump-sum terms.
- Contractors whose order book has grown faster than the finance team's ability to report by contract.
- Firms preparing for a bank limit renewal, a bid requiring audited financial capacity, or an investor review.
Services
Services this work draws on
Costing and profitability
What each product, line and customer really contributes.
Explore service ↗MIS and financial planning
Reporting built around the questions you actually need answered.
Explore service ↗Internal controls and risk
Controls sized to your business, documented and actually tested.
Explore service ↗Banking, funding and due diligence
Information a lender or investor can verify without a reconstruction.
Explore service ↗Outsourced accounting
Your books kept current and reconciled, closed to a published calendar.
Explore service ↗Every other service, also available in this trade
Common questions
Questions owners in this trade ask
Our project managers already track progress. Why would finance redo it?
Finance doesn't redo it; it ties it to the cost ledger. Physical progress and cost-based progress often disagree, and the difference is usually where margin is being brought forward or held back.
What finance support helps in a claim negotiation with the client?
The cost records, variation history and delay cost behind the claim, which we assemble and reconcile to the books. Legal positions on entitlement are for your counsel.
Do you issue the net-worth or turnover certificate needed for tenders?
No. Those are certificates issued by an independently engaged chartered accountant. We prepare the reconciled figures and schedules they rely on.
5th Quadrant maintains contract accounts and prepares the schedules for revenue recognition, guarantees and claims. Statutory audit, tax-audit reports and certificates required for tenders or by lenders are issued by an independently engaged chartered accountant, and legal positions on claims are given by independent counsel, coordinated through 5th Quadrant. Full detail is on our Professional Scope page.
Explore further