FRS 102 is the financial reporting standard (FRS) used by many UK companies to prepare their accounts. Think of it as the rulebook for how businesses record and report their income, costs and profits. It applies to most medium-sized and larger private companies, as well as smaller public companies that aren’t using international standards.
In this article, I discuss the key changes coming in 2026, how they’ll affect your construction project margins, and what practical steps your business should take to prepare.
Why is it changing?
From January 2026, FRS 102 is being updated to better align with international standards. One of the most significant changes affects how construction businesses account for project costs, especially those involved in long-term contracts like major builds, infrastructure projects, or multi-phase developments.
How will project costs be handled differently under the new rules?
The key difference lies in when costs are recognised on your construction projects:
Under the current FRS 102: Revenue and costs are recognised in line with how much of the project has been completed. This creates a smooth and consistent margin across the life of the contract.
Under the revised FRS 102: Revenue is still recognised based on progress. But costs are recognised when they’re actually incurred, not spread out evenly.
This means project margins can appear uneven or “bumpy” from year to year—even if the anticipated overall profit stays the same.
Why do these margin changes matter for your construction business?
This change can make your reported project margins look less predictable. Instead of a steady profit each year on long-term builds, you might see higher profits early on and lower ones later—or vice versa—depending on when major costs like materials, subcontractor payments, or equipment are incurred.
For construction businesses, this could:
- Affect how performance is perceived by banks, investors, and bonding companies
- Influence decisions around project bidding, cash flow forecasting, and financial reporting
- Require closer collaboration between your finance team, project managers, and estimators to explain results clearly
What other key changes should construction companies be aware of?
Tender and bid costs: Costs to win a contract (like estimating, design development, and proposal preparation) may now need to be expensed immediately unless they meet strict criteria
Project mobilisation costs: Costs to set up for a project (like site establishment, temporary facilities, or equipment mobilisation) can only be spread over time if they meet specific conditions
Revenue recognition: Revenue recognition now follows a more detailed 5-step model, focusing on when control of construction work is transferred to the client
How does this work in practice for construction projects?
Let’s look at a real construction scenario. ABC Construction Ltd has a building contract worth £5 million, with expected costs of £4 million, giving an expected margin of 20%. The project is delivered over time, and progress is measured using the output/work surveyed approach.
At year-end:
- Costs incurred to date: £1.3 million
- Surveyed work completed: £2 million (which is 40% of the contract)
Under current FRS 102:
- Revenue: £2 million
- Costs: £1.6 million (40% of £4 million)
- Profit: £0.4 million
- Margin: 20% (smooth and consistent)
Under revised FRS 102:
- Revenue: £2 million
- Costs: £1.3 million (actual incurred costs)
- Profit: £0.7 million
- Margin: 35% (higher than expected, but may dip in later periods)
This example shows how the timing of cost recognition can create different margin patterns compared to the current approach – particularly relevant when major material deliveries or subcontractor payments don’t align perfectly with project progress.
What should construction business owners do to prepare?
Even if you don’t work directly with the finance side, it’s worth:
- Understanding that reported project margins may look less consistent from 2026
- Working with your finance team to align on how project performance is communicated to stakeholders
- Preparing banks, investors, and bonding companies for changes in how results are presented – especially on long-term construction projects
How can we help your construction business?
The transition to revised FRS 102 requires careful planning and implementation for construction companies. We can assess the impact on your current project contracts and accounting policies, help update your systems and processes to handle the new cost recognition requirements and prepare clear explanations for stakeholders about changes in reported project results.
The key is to start planning now. With implementation required for accounting periods beginning on or after January 2026, getting ahead of these changes will ensure a smooth transition and help you communicate effectively with banks, investors, and other stakeholders about what the new numbers mean for your construction business performance.
