Construction and contracting company accounting in the UAE: retention, WIP and revenue recognition
Retention money is still taxable and still liable to VAT the moment you invoice it, not when it is finally released. Most contractors get the timing wrong on both counts.
Construction is one of the few sectors in the UAE where the accounting is genuinely harder than the tax rate suggests. The 9% Corporate Tax rate above AED 375,000 profit is the same as everywhere else. What is different is getting to that profit figure in the first place, because a contracting business runs on multi-year projects, retained cash, and revenue that has to be estimated before it is certain.
This article covers the three things that consistently trip up construction and contracting companies here: retention money and its VAT timing, work in progress valuation, and how IFRS 15 revenue recognition determines what actually lands in your Corporate Tax return.
Retention money: what it is and when VAT falls due
Retention is the portion of each progress payment a client withholds as security against defects, typically 5% to 10% of the certified value, with 10% being the most common figure in UAE contracts. Standard practice splits it in two, half released on practical completion, the remaining half after the defects liability period ends, often around twelve months later.
The accounting question is straightforward. The VAT question is where contractors lose money.
The Federal Tax Authority treats retention as part of the value of the work certified at that stage, not as a separate future supply. That means VAT is due on the full certified amount, retention included, when the invoice is issued or payment is received, not when the retention is eventually released. A contractor who only accounts for VAT on the cash actually collected is underdeclaring output tax on every certificate, and that gap compounds project after project.
| Event | VAT treatment |
|---|---|
| Progress certificate issued for AED 1,000,000, 10% retained | VAT due on full AED 1,000,000, not AED 900,000 |
| Client pays the 90% released portion | No further VAT event, already declared |
| Retention released after defects liability period | No further VAT due, it was already accounted for |
| Client defaults on the retention permanently | Bad debt relief may apply if written off after six months overdue |
The practical fix is a retention ledger that sits alongside your VAT account, tracking certified value, VAT already declared, cash received, and cash still outstanding, per project. Without it, finance teams routinely lose track of which retention balances have already been taxed and which have not.
Work in progress: valuing a project that is not finished yet
Work in progress is the accumulated cost and recognised margin on contracts that are underway at your reporting date. Getting WIP wrong understates or overstates profit for the period, which then flows straight into your Corporate Tax computation.
The two components that matter:
- Cost incurred to date, materials, labour, subcontractor certificates, allocated overhead, measured against the total estimated cost of the contract
- Recognised revenue to date, based on the percentage of completion, using either a cost-to-cost method or a physical output measure such as units installed or milestones certified
A few points that get overlooked:
Provisions for loss-making contracts must be booked immediately, not spread over the remaining life of the project. If a contract is forecast to make an overall loss, the entire expected loss is recognised as soon as it becomes probable, under both IFRS and the resulting tax treatment.
Variation orders and claims are not automatic revenue. Under IFRS 15, variations and claims are only included in the transaction price once it is highly probable they will be approved and will not later be reversed. Booking disputed variations as revenue before agreement is a common way contractors overstate WIP and, by extension, taxable profit.
Retention is a receivable, not a deduction from revenue. The retained amount is still revenue you have earned and is still owed to you, it simply sits as a separate line until released. Netting it off WIP or revenue understates both your balance sheet and your reported profit.
How IFRS 15 revenue recognition feeds into Corporate Tax
Corporate Tax in the UAE starts from your accounting profit under IFRS, with specific adjustments applied afterwards. For a contracting business, that accounting profit is built entirely on IFRS 15’s five-step model:
- Identify the contract with the customer
- Identify the distinct performance obligations, a full turnkey build is often one obligation, while separable elements like design, supply, and installation can sometimes be several
- Determine the transaction price, including only the variations and claims that are highly probable
- Allocate the price across the performance obligations
- Recognise revenue as, or when, each obligation is satisfied
Most construction contracts satisfy their performance obligation over time rather than at a single point, because the client controls the asset as it is built and the contractor has an enforceable right to payment for work completed to date. That means revenue and margin are recognised progressively through the project life, using the same percentage of completion logic as your WIP schedule.
The consequence for tax planning is direct: the profit the FTA assesses each year is not the cash you collected, it is the revenue IFRS 15 says you earned, based on progress, less the costs incurred. A project that is 60% complete on paper carries 60% of its expected margin into this year’s taxable profit, whether or not the client has paid you for it, and whether or not the retention sitting on your balance sheet has been released.
The recurring mistakes we see
- VAT deferred until retention is released, when it was due on the full certified value at invoice stage
- Retention netted off revenue, understating both WIP and taxable profit
- Disputed variation orders booked as revenue before approval is highly probable
- Loss provisions spread over the contract instead of recognised in full immediately
- WIP not revalued at year end, leaving the Corporate Tax return built on stale numbers
Conclusion
None of this changes your Corporate Tax rate, it changes the profit figure the rate is applied to. A construction business with clean project accounting, an accurate retention ledger, and a properly maintained WIP schedule knows its tax position well before the return is due. One without those things finds out at filing time, usually at the worst possible moment for cash flow.
We handle construction sector bookkeeping, VAT and Corporate Tax end to end, built around project-level accounting rather than generic ledgers, at fixed prices.
Talk to us, the initial consultation is free.
As of July 2026. This article is general information and is no substitute for advice in an individual case.
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Frequently asked questions
Do I pay VAT on retention money before I actually receive it?
Yes, in almost every case. The FTA treats retention as part of the value of the certified work, so VAT is due on the full certified amount, including the retained portion, at the time the invoice is issued or payment is received, whichever comes first. Waiting for the retention release before accounting for VAT is a common and costly mistake.
What is the usual retention percentage in UAE construction contracts?
Most UAE construction and contracting agreements withhold between 5% and 10% of each progress payment, with 10% being the most common figure. It is typically split, with half released on practical completion and the remainder released after the defects liability period, often around twelve months later.
Does work in progress need to be revalued every month?
For any project running across reporting periods, yes. WIP should be reassessed at each period end using consistent cost-to-cost or output measures, because an outdated WIP figure distorts both your management accounts and your taxable profit for the period.
How does IFRS 15 affect my corporate tax bill?
Corporate Tax in the UAE is based on accounting profit determined under IFRS, adjusted for tax purposes. Since IFRS 15 governs when and how much contract revenue you recognise, the performance obligations you identify and the method you use to measure progress feed directly into the taxable profit the Federal Tax Authority assesses.
Can I recover VAT on retention I never collect from a client who defaults?
If a client becomes insolvent or simply never pays, and the debt is more than six months overdue and written off in your accounts, bad debt relief may allow you to reclaim the VAT already paid on that unrecovered amount. This needs to be tracked carefully and is worth discussing with your accountant before you write anything off.
Do subcontractors follow the same retention and VAT rules as main contractors?
Yes. The same principle applies down the chain: whoever certifies the work and issues the invoice accounts for VAT on the full certified value, retention included. Subcontractors carrying large retention balances face exactly the same cash flow gap as main contractors, often with less negotiating power to close it.