Construction Companies that are registered in Nigeria and even those that operate in the country pay tax under the Nigeria tax system. The legislation that regulates them is the Companies Income Tax Act, 1993. Section 13 (2) of LFN, 2004 states that profits of a company from any trade or business shall be deemed to be derived from Nigeria. Construction companies often engaged in contract work, which involves the execution of building and civil engineering projects, mechanical and electrical engineering installations and other fabrications normally evidenced by an agreement between two or more parties.
These companies engage in both short and long-term construction contracts that should be completed within twelve months or expected to take more than twelve months to be completed. Thus in this unit, you will be exposed to the ascertainment of profits arising from both short and long-term construction works that are subjected to tax.


At the end of this unit, you should be able to:

  1. distinguish between construction company taxation and other companies’ taxation 
  2. explain percentage-of-completion method and completed- contract method of revenue recognition 
  3. discuss the difference types of construction contracts
  4.  compute taxable profit in proportion to the degree of construction work done. 


3.1 Methods of Computing Profits of Construction

Companies Construction companies are usually engaged in contracts that are long term in nature. It can undertake a contract work that lasts for years. The payment for such contracts is either in installments (as the degree of completed work is ascertained) or at the end of the entire work. Whatever the case, the tax authority expects these companies to declare their profits or losses (by means of returns) on yearly basis. Thus, the accounting standard board has provided two methods for this purpose. 3.1.1 The Completed-Contract Method

Under the completed-contract method used for construction companies, revenue is recognised when the contract is completed. Cost incurred on the contract and billings are accumulated until the contract is completed. Sometimes, there are costs to be incurred at the end of the contract, which may not be material to warrant regarding the contract as uncompleted. Such costs are provided for and the contract is treated as completed. In the construction industry, this is referred to as practical completion stage.

Usually, the completed-contract method for long-term contracts is used by enterprises in a situation where there are no dependable estimates or where there are inherent uncertainties, which make forecasts unreliable. Until the point at which contract is identified as completed, revenue is not recognised.

A major drawback of the completed contract method when applied to long-term contracts is that periodic revenue is subject to distortion and this is not accepted in tax assessment. Revenue prior to completion is not reflected in the accounts of the reporting enterprise even if operations on the contract are uniform over the construction period.


When will it become necessary to accept the complete contract method for tax purposes?

3.1.2 The Percentage-of-Completion Method

Under the percentage-of-completion method used in construction companies, costs that are incurred on a contract are accumulated in an

asset account. The proportion of revenue in relation to the work done may be ascertained by one of the following two methods:

  1.  the percentage of estimated total revenue that the incurred costs to date bears to the estimated total costs; 
  2.  the percentage of total contract value that the engineering and architectural work done to date bears to the engineering and architectural estimate of the whole contract. Where the percentage-of-completion method is used, it is usual to establish that computing the estimated total cost to completion and comparing it with the total estimated revenue do not overstate the revenue. The percentage-of-completion method is used when: (a) there is a contract in which the following terms are included: (i) the goods or services to be provided and received; (ii) the frequency of inspection of work-in-progress and the certification procedures for billing purposes; (b) the contractor has an adequate estimating process and the ability to estimate reliably both the cost to completion and the percentage of contract executed; (c) the contract has a cost accounting system which adequately accumulates and allocates costs to final work in a manner consistent with his estimating process. 

The percentage-of-completion method is considered more reliable because it gives both the accountant and the tax authority a fair measure of activities performed in each accounting/basis period and the resultant revenue and profit. Thus, revenue is adequately matched with costs in the accounting period. Suffice it to say that this is the method tax authority prefers to use for assessing construction companies to tax in Nigeria.


Compare and contrast complete and percentage-of-completion methods of computing profits of construction companies

3.2 Types of Construction Contracts

There are several types of contracts, which can either be fixed sum, cost- plus a fixed rate, re-measure or variable-price. For the purpose of clarity, these will be followed with brief descriptions.

(a) Fixed sum (lump sum) contract
:The contractor undertakes or agrees to execute specific projects or works in consideration for a fixed sum. It excludes variations, escalations, etc.
(b) Cost-plus a fixed rate contract :This allows for reimbursement of agreed costs incurred plus a fixed fee or percentage boost up on the agreed costs incurred.
(c) Re-measure contract :This allows final contract price to be determined by the measurement of final quantities.
(d) Variable-price contract :This contains one or more clauses regarding: (i) price variation that allows adjustments to base price; (ii) work variation for an additional work order from an employer; (iii) prolongation that takes care of additional costs resulting from delays not caused by the contractor.


In your opinion, what is the best type of construction contract?

3.3 Computation of Taxable Profit

The computation of taxable profit for a construction company is the same with other companies in the sense that allowable and non- allowable expenses applicable to the latter also applies to the former. This is more so if the contract work being undertaken by the company is short-term contract and the amount for the contract is payable within a reasonable time frame. However, where the contract is contrary to the above description or long-term in nature, certificate of work done and the amount payable thereto shall be considered as revenue/turnover for the relevant year of assessment and the expenses to be matched with revenue shall be determined based on the degree of completion or work done which must be in proportion to the revenue realised due to certification.

3.3.1 Capital Allowances

Capital allowances for construction companies are pro rated according to the degree of work done and according to the number of months in the basis period. However, for the initial allowance, it is given wholly in the year of assessment in which the qualifying expenditure was procured. Any equipment procured for the construction contract but not used within the basis period that covers the year of assessment shall not be considered for any capital allowance for the purpose of taxation for the relevant tax year.


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