Construction and Contracting Accounting in Iran: Revenue, Progress Billing and Deductions
Contracting is the one industry where a company can be fully booked, hold a drawer full of approved certificates, and still run out of cash. The cause is structural: how revenue is recognised, and how much of each payment never arrives as money. This walks through the life of a contract and the entries that generate the most friction — with the employer and with the assessor.
Why contracting accounting is different
In a goods sale, the transaction is a moment. A contract can run three years, be adjusted for price escalation, have part of its value locked up until two years after completion, and carry several statutory deductions on every payment. Three consequences follow: revenue cannot track cash; costs must be accumulated per contract and per site; and a large share of the balance sheet is deducted receivables rather than money.
Account structure
The first thing I set up is each contract as an independent cost centre with a permanent code, broken down into materials, labour, plant, subcontractors and site overhead. Without that, cost-based progress cannot be computed and true project profitability is never known.
| Account | Nature | Purpose |
|---|---|---|
| Contract work in progress | Asset | Accumulated contract costs |
| Work performed | Revenue measure | Actual progress |
| Certificates issued | Contra | Formal claim on the employer |
| Advances received | Liability | Cash for work not yet done |
| Retention receivable | Asset | Usually 10% of each certificate |
| Insurance deposit (Article 38) | Asset | Held until clearance certificate |
| Provision for contract loss | Liability | Foreseeable loss |
Percentage of completion in practice
Iranian practice has moved from the long-term contracts standard to the revenue-from-contracts-with-customers standard, but the logic is unchanged: where the performance obligation is satisfied over time, revenue follows progress.
The usual method is cost-to-cost. Two errors recur. First, including unused materials on site in costs incurred — material that has not been consumed has produced no progress. Second, failing to refresh the total estimated cost. In an inflationary economy, an estimate made in month one is stale by mid-year and inflates measured progress.
If the outcome cannot be estimated reliably, revenue is capped at recoverable costs with no profit. Foreseeable losses, by contrast, are recognised immediately and in full. The asymmetry is deliberate.
Physical progress certified by the consultant and financial progress derived from costs are rarely the same number. Keep both and document the reconciliation — that file is what makes a defence meeting short.
Recording progress billings
- Record the receivable from the approved certificate, not the version you submitted.
- Post deductions gross: full approved amount to the employer's account, each deduction to its own account. Net posting hides deposits from management.
- Recognise escalation and material differentials only when reliably measurable; booking them early creates phantom profit.
- Treat the final certificate and provisional handover as separate tracked events.
What gets deducted
Retention of roughly 10% per certificate, released partly at provisional and partly at final handover. The insurance deposit under Article 38, held until the contractor obtains a social security clearance certificate. Contractor-side insurance contributions, where the approved coefficient for labour-only contracts is materially higher than for mechanised contracts — misclassifying the contract type is a classic route to a large closing liability. Recovery of the advance payment. And VAT at the standard 10% rate charged on top and settled with the tax administration.
The most common error I find in contracting files is not recording deducted deposits as assets. Years later the contractor discovers substantial unreleased retention that was never tracked in any account and for which the supporting documents are gone.
Where Article 104 stands
Many people still talk about "the 3% Article 104 deduction". Article 104 was repealed by the 2015 amendment and the control mechanism shifted to transaction reporting. Files covering earlier periods are still computed at the rate then in force, certain payments continue to carry withholding duties, and some public bodies apply their own contractual deductions. The day-to-day compliance load now sits with quarterly transaction reports and electronic invoicing — see the withholding tax guide for which payments remain in scope.
Closing a contract file
- Reconcile approved certificates to the contract value and all addenda.
- Clear and close the advances account.
- Obtain the social security clearance certificate and release the Article 38 deposit.
- Release retention after final handover.
- Transfer the work-in-progress balance to cost of sales and bring the contract account to zero.
- Archive the complete file: contract, addenda, certificates, minutes, clearances.
Key takeaways
- Revenue follows progress, not cash and not the certificate you issued.
- Refresh total cost estimates regularly; stale estimates manufacture profit.
- Recognise foreseeable contract losses immediately and in full.
- Post deductions gross and track every deposit until it is released.
- Article 104 was repealed in 2015; control now runs through transaction reporting and e-invoicing.
Frequently asked questions
When should contract revenue be recognised?
Is an approved payment certificate the same as revenue?
How should retention and the insurance deposit be recorded?
Does the 3% deduction under Article 104 still apply?
Have a question? Just ask
One short call is usually enough to know where you stand. If I miss you, I will call back.