## Contract Revenue – Components and Measurement

### Base Amount

Agreed contract price
Agreed cost escalation (built into the contract)

### Additional Revenue Items (Conditional)

Item	Include Only When
Claims (amounts sought from customer for extra costs)	Customer will accept the claim AND amount can be measured reliably
Incentive Payments (bonus for early completion)	It is probable the specified performance target will be met AND amount is measurable reliably
Variations (changes in scope approved by customer)	Customer has approved the variation

### Deductions from Revenue

Penalties for late completion: Deduct only when it is probable that the penalty will have to be paid

### Formula

```

Contract Revenue

= Agreed Price

+ Cost Escalation (as per contract)

+ Claims (only if probable & measurable)

+ Incentive Payments (only if probable & measurable)

+ Approved Variations

− Penalties (only if probable)

```

### Key Test: Reliable Measurement

Both probability of receipt AND reliable measurement must be satisfied for claims and incentive payments. Failing either condition → exclude from revenue.

Worked example

### Example 1

Example: Calculate Contract Revenue

Data:

Fixed price: ₹5 crore
Incentive payment for early completion: ₹0.05 cr (target likely to be met ✓)
Labour cost escalation: 10% × ₹2.5 cr = ₹0.25 cr (allowed cap: ₹0.20 cr)
Material cost escalation: 8% × ₹1 cr = ₹0.08 cr (within cap ✓)

Step 1 – Base Contract Revenue:

Item	₹ crore
Fixed price	5.00
Labour escalation (capped at ₹0.20 cr)	0.20
Material escalation	0.08
Incentive payment (probable)	0.05
Total Contract Revenue	6.20 (approx)

Step 2 – Additional adjustments later approved:

Variation (additional floor approved): +₹1.00 cr
Claims recoverable from customer (customer accepted, reliably measured): +₹0.20 cr

Revised Contract Revenue = ₹6.20 + ₹1.00 + ₹0.20 = ₹7.40 crore

⚠️ Common exam mistakes

Including ALL claims in revenue — only include claims the customer is likely to accept AND which can be measured reliably.
Always including incentive payments — include only when it is PROBABLE the performance target will be met.
Forgetting to deduct penalties when it becomes probable they will be paid.
Including unapproved or disputed variations in contract revenue.
Treating cost escalation as always includable — it must be agreed/specified in the contract to be included.

Bare-Act text Paras 10–14 (Contract Revenue) · AS 7 – Construction Contracts · click to expand

Contract revenue should comprise: (a) the initial amount of revenue agreed in the contract; and (b) variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and they are capable of being reliably measured.

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