A contractor's annual report carries two figures about the same subject, four pages apart. In the notes on contingencies: claims aggregating ₹3,100 crore are pending in arbitration and litigation against various clients. In the note on other financial assets: ₹1,400 crore described as amounts recoverable in respect of claims, included in the accounts. A message board treats the ₹3,100 crore as hidden value the market has not noticed. That is precisely the wrong way round. The ₹1,700 crore that has not been recognised is the upside — genuine, contested, and outside reported profit. The ₹1,400 crore that has been recognised is not upside at all: it is profit the company has already put through its income statement, in earlier years, for work it did and money it has not received, and whose fate now depends on a tribunal.
A contractor who built a hall has two pieces of paper pinned above his desk. One is a bill for extra beams the owner asked for verbally and now denies asking for; he has not put it in his books. The other is an amount he did enter in his books three years ago, for six weeks his crew sat idle waiting for the owner's electrician, and the case is in its fourth hearing. A visitor who congratulates him on both amounts has understood neither. Only the first is a possible gain. The second is money he has already counted as earned, and if the case goes badly he is not losing an opportunity, he is unwinding a profit he has already spent.
Contract accounting keeps those two categories rigorously apart, and the note tells you which is which. Reading the total and feeling optimistic collapses the only distinction that matters.
What a claim actually is
- A variation claim is for work outside the original scope, directed by the client. Disputes here are usually not about whether the work was done but about whether it was properly instructed, at what rate, and by somebody with authority to instruct it.
- An extension of time claim asks for the deadline to move because the delay was the client's — site not handed over, drawings late, a clearance not obtained. It matters even without money attached, because without it the contractor is exposed to liquidated damages for a delay it did not cause.
- A prolongation or idling claim is the money version of the same event: plant, staff and site overheads standing idle for the period of the client's delay. These are the largest claims in Indian contracting and the hardest to prove, because the cost has to be attributed to a specific delay caused by a specific party.
- An escalation claim arises where the contract provides for a price adjustment and the parties disagree about the formula, the base date or the applicable index.
- A claim is not the same thing as a receivable, and it is not the same thing as retention. Retention is an amount the client agrees it owes and is entitled to hold. A claim is an amount the client says it does not owe.
The asymmetry against the liability side
A claim not recognised as revenue becomes a contingent asset, and the treatment of contingent assets is the mirror image of the treatment of contingent liabilities — deliberately, and in the direction of caution. A contingent liability becomes a provision and hits profit when an outflow is probable and can be measured. A contingent asset is never recognised at "probable"; it is disclosed where an inflow is probable, and recognised only when realisation is virtually certain, at which point it stops being contingent at all. The same word, probable, forces a charge on one side of the balance sheet and buys only a paragraph on the other.
| Situation | Liability side | Asset side |
|---|---|---|
| Remote | Nothing — not even disclosed | Nothing — not even disclosed |
| Possible, not probable | Disclosed as a contingent liability in the notes | Nothing. Not disclosed at all |
| Probable, and measurable | Provided for. Profit is reduced now | Disclosed in the notes. Nothing enters profit |
| Virtually certain | Provided for, as above | Recognised as an asset — and at that point it is no longer contingent |
- 1Separate recognised from disclosed
One number is inside profit and one is not. The recognised amount is a risk to earnings already reported; the disclosed-only amount is optionality that costs nothing if lost. They belong in different columns of your notes, and adding them is the commonest error in this area.
- 2Find the cash realisation, year by year
Claims recovered in cash during the year, against claims recognised during the year and the opening balance. Five years of that is the only external evidence of whether the judgement has been sound. Many companies do not present it and will answer the question on a call.
- 3Age the recognised balance and identify the counterparties
A claim against a private client who has already begun negotiating is not the same asset as one against a department that has appealed two awards in the same project. Concentration matters here as much as anywhere: one claim that is 40% of the balance makes the balance a single-event exposure.
- 4Read the key audit matters and the emphasis paragraphs
Recoverability of claims and contract assets is among the Key Audit Matters most often reported for Indian contractors, for the obvious reason that an auditor cannot verify the outcome of a hearing. What the auditor says it did — read legal opinions, discuss with management, examine correspondence — tells you how much of the number is a representation.
- 5Compare cumulative profit with cumulative operating cash flow
Over five or seven years these two should be recognisably related in a business that collects. A persistent, widening gap in a contractor is usually the sum of this module: unbilled revenue, retention money and recognised claims. The gap does not tell you which. It tells you that the notes are where the year actually happened.
An award arrives for ₹640 crore and the stock rises 9%
A contractor announces to the exchange that an arbitral tribunal has awarded it ₹640 crore plus interest against a state utility. The notes to the last annual report showed the underlying claim at ₹380 crore recognised in the accounts, with the balance disclosed only.
Module checkpoint: the contract that spans three years
5 questions. Answers are revealed once you submit all of them.
1.A company's order book rises from ₹27,000 crore to ₹31,000 crore. Order inflow for the year was ₹9,400 crore, ₹10,400 crore of revenue was executed out of the book, and ₹500 crore of orders were cancelled. What does the reconciliation establish?
2.A ₹1,200 crore fixed-price contract was estimated to cost ₹1,000 crore and is 60% complete, with ₹720 crore of revenue and ₹120 crore of profit recognised. The estimate of total cost is then revised down to ₹950 crore, and ₹160 crore is spent during the year taking costs incurred to ₹760 crore. What does the year report?
3.A contractor's receivable days fall from 74 to 72 while unbilled revenue rises from 52 to 70 days, retention money rises from 28 to 37 days and contract liabilities fall from 78 to 44 days. What has happened?
4.A fixed-price contract is 50% complete when the contractor concludes total costs will exceed the contract price by ₹60 crore. How is that treated, and how would a ₹60 crore improvement have been treated at the same point?
5.A contractor discloses ₹3,100 crore of claims pending in arbitration, of which ₹1,400 crore has been recognised in the accounts. How should the two figures be read?
Note mein do figure: ₹3,100 crore ke claim arbitration mein, jinme se ₹1,400 crore kitaab mein pehle se likh diya gaya. Log ₹3,100 crore ko chhupa khazana samajhte hain — ulta hai. Jo ₹1,700 crore likha nahi gaya, wahi asli upside hai: haar gaye to ek rupya nahi jaayega. Aur jo ₹1,400 crore likha gaya hai, woh profit mein pehle se gin liya gaya hai — haar gaye to purana profit wapas jaayega. Paanch saal ka pre-tax profit ₹2,100 crore, uska do-tihaai (₹1,400 crore) tribunal ke bharose. Agar 40% mila, ₹840 crore ka gap — ₹2,800 crore net worth ka 30%. Aur award mil bhi gaya to paisa nahi mila: sarkari client appeal karta hai, aur usme saal lagte hain.
- Separate claims recognised in the accounts from claims only disclosed — one is a risk to reported profit, the other is free optionality.
- A claim is variable consideration: it enters revenue only if a significant later reversal is highly improbable.
- Contingent liabilities are provided for at "probable"; contingent assets are recognised only at "virtually certain".
- An arbitral award is a change in probability, not a receipt — it can be challenged and enforcement takes years.
- Cash realised against claims, tracked over five years, is the only external test of whether the judgement has been sound.
Mark it done to track your progress through the curriculum.