Are Contractors Playing With Fire? Construction Projects And 'Uncertified Revenue'

• Published date: 02 May 2020
• Author: Mr Sean Hardy and Mark Arden
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Contracts and Commercial Law, Construction & Planning
• Law Firm: Clyde & Co

Uncertified revenue is the value of work as assessed by a contractor which has been completed but not yet certified and paid by an employer. It typically could include the value of measured works, changes to the works and / or other claimed entitlements.

Practices in the industry vary hugely. However, some contractors account for uncertified revenue on a basis which is - at best - optimistic and - at worst - wildly unrealistic. They may assume that the vast majority, or even 100% of uncertified revenue will be realised when reporting internally and externally. This approach can pose serious risks.

Following the collapse of Carillion in the UK in 2017 it was found that '294 million of the '729 million revenue reported in its accounts but which it would not actually receive concerned unapproved variations and other claims submitted to clients (i.e. uncertified revenue). Although there were many other failings, this unrealistic accounting of uncertified revenue was a major factor in masking Carillion's failing health.

While Carillion is a dramatic example, any inaccurate reporting regarding likely recovery of uncertified revenue can have dire consequences. With profit margins on projects so tight it can disguise problems and delay remedial action which can be the difference between financial success and failure.

Why do some contractors fail to account for uncertified revenue realistically?

Large projects are extremely fast paced and involve arduous reporting obligations, both externally to the employer and internally to management. Project teams are often ill-equipped to make accurate, timely assessments of their claims and other risks, and of the financial repercussions.

Both the construction market and the environment during project execution are also extremely competitive. Major projects typically involve high capital spend, neutral cash flow and very narrow profit margins. Individuals and teams at various levels of contractor businesses may feel under great pressure to paint an optimistic picture regarding financial positions and projected outcomes (what psychologists refer to as 'optimism bias').

The key question, however, is not whether uncertified revenue should be accounted for when reporting internally and externally. In many cases it has to be in order to track progress and the likely financial outcome of a project with any degree of accuracy. Doing so is critical for identifying problems, avoiding any sudden deterioration in...