The loss on a job order goes into the accounts in full in the year it becomes foreseeable

3 November 2026, 08:13

A job order, that is, work carried out to a customer's order at a price fixed in the contract, brings its result into the accounts one financial year at a time when it lasts more than a year, and a loss can stay hidden until someone updates the cost estimate. On 2 November Alstom, the French maker of railway equipment, announced that six contracts for regional trains in Germany, worth around €5 billion in total, are all loss-making, with the first certification expected in March 2028: the operating margin the group expects for the current financial year has fallen from 6.5% to around 1% of revenue.

The result of a long job order is recognised while the work is done

What a company has already built to order and not yet delivered sits in the financial statements among inventories, under the item for contract work in progress. The Italian Civil Code, in article 2426, provides two ways of valuing that item, which the accounting standard OIC 23 explains. Under the completed-contract method the work stays recorded at cost, and the revenue and the profit enter the accounts only on delivery. Under the percentage-of-completion method, by contrast, each financial year receives the share of revenue corresponding to the work carried out, and therefore also its share of the result. For job orders lasting more than a year OIC 23 requires the second method, provided there is a binding contract and the result can be estimated reliably.

The most common way of measuring progress is called the cost-to-cost method: the spending incurred up to a given date is divided by the total expected for the job order, and the resulting percentage is applied to the contract price. If the spending so far is half of what was planned, the same share of the price becomes revenue. The calculation holds only if the divisor is right, and the divisor is an estimate: what has already been spent plus what it will cost to finish.

When the estimate changes, the profit and loss account absorbs it all in one year

Every time the forecast of the costs to complete is updated, the expected result of the job order changes, and OIC 23 establishes that the effect of the new estimate on the work already carried out is recorded in full in the financial year in which the update takes place.

If the total expected spending then exceeds the price, the rule becomes stricter. Paragraph 108 of OIC 23 requires the probable loss to be recognised in the financial year in which it becomes foreseeable, regardless of the progress reached, and without offsetting it against the gains expected on other job orders. It is recorded by reducing the value of the work in progress and, if the loss exceeds that amount, by setting aside the difference in a provision for risks and charges. The reason is prudence: a loss that can already be foreseen is not spread across the years in which the work is done.

An example. A company that builds bottling lines signs a contract for a plant worth €7.5 million, with expected costs of €6.6 million. At the end of the first year the plant is half built and the profit and loss account recognises €450,000 of result. In the second year the technical department redoes the estimate and total spending rises to €7.8 million, more than the price. The financial statements for that year must reverse the result recognised the year before and record at once the whole expected loss, €300,000, even though part of the plant is still to be built.

Estimating the costs to complete is a monthly task

For OIC 23, cost and revenue estimates are the essential tool for spotting losses in time, and they are updated periodically with actual figures. In companies that work to order this task belongs to the project manager, together with the technical department and purchasing: every month the hours and materials used are compared with those expected for the phases already closed, the quantities for the remaining ones are reviewed, and the late-delivery penalties written into the contract are put into the sums as costs of the job order.

The controlling of a company that works to order rests on that comparison. Noticing sooner does not change the accounting rule: the loss goes entirely into the year in which it is seen in any case. What changes is how much can still be done to reduce it. Whoever updates the forecast only at the end of the year, for the financial statements, discovers the loss months after it arose, when many phases have already been carried out and few costs are left to act on; whoever redoes the estimate every month still has time to ask the customer for a variation or to change the way the remaining phases are carried out.

One question remains to ask about one's own open job orders: for how many has the estimate of the costs to complete been redone in the last month, and for how many does it still date back to the estimate made for the bid?

This article was prompted by a news item published in Reuters on 2 November 2026.