TRW & Co · Accounting, audit and bookkeeping
Construction Company Audits in the UAE: Contracts, Revenue and Controls
A construction audit UAE contractors face turns on estimates: revenue on long-term contracts under IFRS 15, recoverability of variations and claims, liquidated damages, retention, bonds and subcontractor accruals. Each depends on the contract and on the Civil Transactions Law in force since 1 June 2026, including ten-year decennial liability. Here is what auditors test and how to prepare.
Key pointThe weakest point in most contractors' accounts is a variation or claim recognised without proper contractual notices; reviewing notices with counsel before the audit is the fastest way to avoid a large adjustment.
At a glance
Revenue over time
Most contractors recognise revenue as work progresses, usually costs incurred against total estimated costs, so the cost-to-complete forecast drives profit.
Claims need support
Unapproved variations and claims count only to the extent a significant reversal is highly probable not to occur under IFRS 15.
Losses booked at once
Where expected costs exceed revenue on a contract, IAS 37 requires the whole expected loss to be recognised immediately as an onerous contract.
Ten-year liability
Contractors and engineers remain jointly liable for structural defects for ten years from handover, and the guarantee cannot be excluded by contract.
Audit for tax too
Taxpayers with revenue above AED 50 million must prepare audited financial statements under Ministerial Decision No. 84 of 2025.
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Construction audit UAE: the short answer
A construction audit UAE contractors go through is harder than an ordinary statutory audit because most of the numbers are estimates tied to contracts. The auditor's main questions are how much revenue to recognise on long-term projects, whether variations and claims are recoverable, whether retention, bonds and liquidated damages are reflected properly, whether subcontractor costs are complete, and whether loss-making contracts and defects exposures are provided for.
Each of those questions has a legal answer as well as an accounting one. Whether a variation is enforceable, whether a bond can be called, and how long the contractor remains liable for structural defects depend on the contract and on the UAE Civil Transactions Law, in force in its new form since 1 June 2026. Good audits therefore need contract files, not just ledgers.
This guide covers the audit risks specific to contractors, how the law shapes provisions and disclosures, and how internal audit can keep project controls in shape. The accounting and audit work itself is delivered with our group company A&A Consultancy; TRW & Co, as a law firm, covers the legal and contractual side.
The legal and accounting framework
- Company law. The Commercial Companies Law requires mainland LLCs and joint stock companies to have their accounts audited each year. Free zone contractors follow their zone's rules, which commonly require audited accounts too.
- Corporate tax. Taxable income starts from accounting profit under the Corporate Tax Law, so revenue recognition judgments flow straight into tax. Ministerial Decision No. 84 of 2025 requires audited financial statements from taxpayers with revenue above AED 50 million, a threshold many contractors pass.
- Accounting standards. IFRS 15 governs revenue from construction contracts and IAS 37 governs provisions, onerous contracts and contingent liabilities.
- Contract law. The Civil Transactions Law issued by Federal Decree-Law No. 25 of 2025 contains the rules on contracting (muqawala), including the mandatory ten-year decennial liability for buildings and fixed installations.
- Licensing. Contractors need an emirate-level contracting licence, and many public and private employers require a classification or prequalification grade that depends on audited financial capacity.
Our guide to construction contracts in the UAE explains the standard forms, and our overview of the new Civil Transactions Law covers the wider changes.
Revenue on long-term contracts under IFRS 15
Most construction contracts transfer control to the employer as work progresses, so revenue is recognised over time by measuring progress towards completion. Contractors in the UAE usually use an input method, typically costs incurred compared with total estimated costs. That makes the estimate of cost to complete the single most important number in a construction audit UAE auditors review.
The auditor will test:
- Budgets and forecasts. Whether the cost-to-complete estimate is supported by current quantities, rates, subcontract commitments and programme, and whether it has been updated for known problems.
- Uninstalled materials and mobilisation. Costs that do not reflect progress, such as materials delivered but not installed, may need to be excluded from the measure.
- Contract assets and liabilities. Unbilled work, advance payments and billings in excess of work done must be presented correctly, with retention receivable shown as a contract asset or receivable depending on its terms.
- Onerous contracts. Where total expected costs exceed expected revenue, the expected loss must be recognised immediately under IAS 37, not spread over the remaining life.
Variations, claims and liquidated damages
Variations and claims are where accounting and law meet most directly. Under IFRS 15, a contract modification is accounted for when it is approved, and unpriced variations or claims are treated as variable consideration, included only to the extent that it is highly probable that a significant reversal will not occur. The auditor will want to see the contractual basis for each item, its approval status, the engineer's or employer's correspondence, and any expert or legal assessment.
Liquidated damages for delay work in the opposite direction. If the contractor is late and the employer is entitled to deduct delay damages, the expected deduction reduces the transaction price. Whether an extension of time is likely, whether the damages are enforceable as agreed and whether a court or tribunal could adjust them are legal judgments that support or undermine the accounting.
Prepare a claims and variations schedule that a lawyer has reviewed before the auditor arrives. For each item, record the contract clause relied on, notices given and when, the employer's response, and a reasoned view on recoverability. Notice requirements under standard forms are strict, and a claim with missed notices is a weak basis for recognising revenue.
Bonds, retention and subcontractors
Performance bonds and advance payment guarantees
Bank guarantees issued for the contractor are not usually liabilities on the balance sheet, but they must be disclosed, and a call that is probable must be provided for. The auditor will confirm guarantees directly with the banks and ask whether any employer has threatened a call. Because on-demand guarantees can often be called without proof of breach, the legal question is usually whether a call could be restrained, which our guide to the UAE guarantees law addresses.
Retention
Retention held by the employer is typically released in stages, at completion and at the end of the defects period. The auditor tests whether retention balances are recoverable, especially on projects with open defects or disputes, and whether the contractor is withholding retention from subcontractors on the same terms. Mismatched release terms create cash gaps the accounts should reflect.
Subcontractor payments and accruals
Subcontractor costs are the largest cost line for most main contractors and the most common source of unrecorded liabilities. Auditors compare subcontract values, certified work and payments, and look for work done but not yet certified at the year-end. Back-to-back and conditional payment clauses affect when a liability exists; their enforceability under UAE law should be checked rather than assumed.
Construction audit UAE risk areas at a glance
| Risk area | What the auditor tests | Legal or contractual link |
|---|---|---|
| Revenue over time | Cost-to-complete estimates, measure of progress, contract assets and liabilities | Scope, price and payment terms in the contract |
| Variations and claims | Approval status, variable consideration constraint, supporting correspondence | Variation and claims clauses, notice requirements, Civil Transactions Law |
| Liquidated damages | Expected deductions against revenue, extension of time entitlement | Delay damages clause and the court's power to adjust agreed damages |
| Bonds and guarantees | Bank confirmations, disclosure, provisions for probable calls | Guarantee wording, on-demand versus conditional, injunction prospects |
| Retention | Recoverability, ageing, release conditions | Retention and defects clauses |
| Subcontractors | Completeness of accruals, back-charges, disputes | Subcontract terms, conditional payment clauses |
| Defects and decennial liability | Provisions, contingent liability disclosure, insurance | Mandatory ten-year liability for structural defects |
| Onerous contracts | Forecast losses recognised in full | Fixed-price terms and risk allocation |
Defects, decennial liability and provisions
Onshore, the contractor and the engineer are jointly liable for ten years from handover if a building or fixed installation collapses wholly or partly, or develops defects threatening its stability or safety. The guarantee cannot be excluded or capped by contract, and a claim cannot be heard after three years from the collapse or discovery of the defect. The new Civil Transactions Law keeps the regime, and projects signed before 1 June 2026 may still be argued partly under the 1985 code.
For the accounts, that means a contractor's exposure survives the contractual defects period. Where a specific defect is known, IAS 37 requires a provision if an outflow is probable and can be estimated, or a contingent liability disclosure if it is only possible. Insurance recoveries are recognised separately and only when virtually certain. Our guide to decennial liability in the UAE explains who carries the risk and how to manage it.
How a construction audit UAE contractors pass runs in practice
- Agree the project list. Identify every contract in progress or in its defects period, with contract value, billings, costs, forecasts and disputes.
- Refresh forecasts. Project managers update cost-to-complete estimates at the year-end and sign them off; finance reconciles them to the ledger.
- Review contracts. The audit team, supported by legal review where needed, reads the key terms of significant contracts, variations and subcontracts.
- Test claims and variations. Each material item is supported by correspondence, notices and a recoverability assessment.
- Confirm guarantees and balances. Banks confirm guarantees; significant employers and subcontractors confirm balances where possible.
- Assess provisions. Onerous contracts, defects, decennial exposure, litigation and arbitration are reviewed with management and counsel.
- Report and follow up. The auditor issues the opinion and a management letter; control weaknesses feed the internal audit plan.
Internal audit and project cost controls
Statutory auditors look at the year-end. Internal audit can catch problems while there is still time to fix them. For contractors, the most useful internal reviews are:
- Project cost control. Budget approvals, commitment tracking, monthly cost reports and variance analysis against the forecast.
- Procurement and subcontracting. Tender process, approval of awards, back-to-back terms and conflicts of interest.
- Site controls. Material receipts, stock at site, plant utilisation, timesheets and labour camps.
- Commercial management. Notices, variation logs, extension of time claims and payment applications.
- Compliance. Licences, permits, health and safety, workers' wages through WPS and VAT on progress billings.
Internal audit also prepares the ground for the year-end. A contractor whose commercial team keeps notices, variation logs and forecasts current throughout the year will find that the construction audit UAE auditors carry out is shorter, cheaper and less likely to end in a qualified opinion. The same records support the company's position if a claim later goes to arbitration, because the evidence was created at the time rather than reconstructed under pressure.
Our internal audit checklist for UAE companies sets out a full process-by-process approach and a report format boards can act on.
Illustrative scenario: a delayed fit-out contract
Illustrative only; the parties are generic. A Dubai fit-out contractor is six months late on a fixed-price hotel project. It has submitted variation claims for design changes and an extension of time claim, while the employer has signalled that delay damages will be deducted and that the performance bond may be called.
During the construction audit, the auditor asks for the contractual basis of the claims. The contractor's lawyers review the notices and find that some were sent late, so only part of the variation value is treated as highly probable. The expected delay damages reduce revenue, the revised forecast shows a loss, and an onerous contract provision is booked. The bond is disclosed, with a note on the threatened call. The accounts are less flattering but defensible, and the contractor enters negotiations with a realistic view of its position.
Risks and common mistakes
Booking claims as revenue too early
Recognising unapproved variations or claims at full value inflates profit and invites a qualified opinion. IFRS 15 allows variable consideration only to the extent a significant reversal is highly probable not to occur. Support each claim with the contract clause, notices and a recoverability view, and expect the auditor to challenge optimistic assumptions. Overstated revenue also overstates taxable income.
Stale cost-to-complete estimates
Forecasts prepared at tender stage and never updated are the most common reason construction audit UAE adjustments are large. Require project managers to refresh forecasts monthly and certify them at year-end, and investigate projects where margin stays flat while costs rise. A forecast that has not moved in a year is a warning sign, not a comfort.
Ignoring liquidated damages and bond calls
Contractors sometimes leave delay damages out of the accounts because they intend to dispute them. The accounting reflects the expected outcome, not the hoped-for one. Threatened bond calls need disclosure and, if probable, provision. Take legal advice early on extension of time entitlement and on whether a call could be challenged; our construction disputes practice handles both.
Forgetting decennial exposure after handover
Closing out a project and releasing retention does not end the contractor's exposure. Structural defects can surface for ten years after handover, and the guarantee cannot be contracted out. Keep project records, insurance policies and subcontractor warranties for the full period, and review known defects at each year-end for provisions or disclosure.
Cross-border angle and next steps
Many UAE contractors are part of groups from India, China, Korea, Europe or the GCC, and use group subcontractors and suppliers. Related-party subcontracts must be priced at arm's length and documented for transfer pricing, and the margins should be consistent with what the audited accounts show. Joint ventures need clear agreements on who accounts for which share of revenue, costs and claims.
- Maintain a contract register with values, forecasts, claims, bonds and retention for every project.
- Have significant claims, variations and threatened bond calls reviewed by counsel before the year-end.
- Refresh cost-to-complete forecasts monthly and certify them at year-end.
- Track defects and decennial exposure for ten years after each handover.
The audit and accounting engagement is delivered with our group company A&A Consultancy. TRW & Co advises on the legal side of a construction audit UAE contractors face: contract and claims reviews, bond calls, decennial liability, subcontract disputes and construction arbitration, working with registered tax agents on Federal Tax Authority matters; we are not auditors or tax agents, and where court representation is needed we work alongside locally licensed advocates. To discuss a project, contact our Dubai team at info@trw.co or +971 58 942 1012.
Frequently asked questions
01Do construction companies in the UAE need an audit?
Mainland LLCs and joint stock companies, including contractors, must have their accounts audited each year under the Commercial Companies Law, and most free zones also require audited accounts. Corporate tax adds a separate test: taxpayers with revenue above AED 50 million, and every qualifying free zone person, must prepare audited financial statements. Employers and banks often require audited accounts for prequalification, classification and bonding facilities as well.
02How do contractors recognise revenue under IFRS 15?
Most construction contracts transfer control as work progresses, so revenue is recognised over time by measuring progress, typically by comparing costs incurred with total estimated costs. The estimate of cost to complete is therefore critical. Contract assets and liabilities arise where billings differ from work done, and any expected loss on a contract must be recognised immediately as an onerous contract provision.
03Can a contractor include pending claims in revenue?
Only to a limited extent. Under IFRS 15, unapproved variations and claims are variable consideration and can be included only to the extent it is highly probable that a significant reversal will not occur. The auditor will look for the contractual basis, notices given on time, the employer's response and an assessment of recoverability. Claims with missed notices or weak entitlement usually cannot be recognised.
04How does decennial liability affect a contractor's accounts?
Onshore, contractors and engineers are jointly liable for ten years from handover for collapse or defects threatening a structure's stability or safety, and the guarantee cannot be excluded. Where a specific defect is known and an outflow is probable and measurable, a provision is required under IAS 37; where it is only possible, a contingent liability is disclosed. Insurance recoveries are recognised separately.
05How should performance bonds be shown in the accounts?
Bank guarantees such as performance bonds and advance payment guarantees are usually disclosed rather than recorded as liabilities, and auditors confirm them directly with the banks. If an employer has called or is likely to call a bond and an outflow is probable, a provision is needed. Whether a call can be challenged depends on the guarantee wording and is a legal question worth answering before the year-end.
06What should internal audit review in a construction company?
The most useful reviews cover project cost control and forecasting, procurement and subcontracting, site controls over materials, plant and labour, commercial management of notices, variations and extension of time claims, and compliance with licences, permits, WPS and VAT on progress billings. Internal audit can catch problems during the year that the statutory auditor would only find at the year-end.
Sources and official materials
- IFRS 15 Revenue from Contracts with Customers — Revenue over time, contract modifications and variable consideration
- IAS 37 Provisions, Contingent Liabilities and Contingent Assets — Onerous contracts, provisions and contingent liabilities
- Federal Decree-Law No. 25 of 2025 Promulgating the Civil Transactions Law — Contracting rules and decennial liability, in force from 1 June 2026
- Federal Decree-Law No. 32 of 2021 on Commercial Companies — Annual audit for LLCs and joint stock companies
- Federal Decree-Law No. 47 of 2022 (Corporate Tax Law) — Taxable income based on accounting profit
- Ministerial Decision No. 84 of 2025 on Audited Financial Statements — Audited statements for taxpayers above AED 50 million revenue
General information only, current as at 27 October 2026. It is not legal advice and does not create a lawyer–client relationship. UAE law differs between the onshore jurisdiction, the DIFC, ADGM and the free zones, and changes frequently; check current official sources and take advice on the facts of your matter.
