Onerous contract

[edit] Introduction

An onerous contract (sometimes referred to as a loss making contract) can occur when the cost of meeting the obligations agreed under the contract exceeds the anticipated economic benefit to be received.

[edit] IAS 37

The International Accounting Standard 37: Provisions, Contingent Liabilities and Contingent Assets, or IAS 37, is an international financial reporting standard that applies to practices associated with onerous contracts.

In May 2020, the IAS Board issued Onerous Contracts - Cost of Fulfilling a Contract as amendments to IAS 37. The amendments specify which costs an entity includes in determining the cost of fulfilling a contract for the purpose of assessing whether the contract is onerous.

[edit] Onerous contracts and the Sourcing playbook

An onerous contract may be apparent from the beginning of the project, or it can become apparent due to changes in availability, unpredictable costs or other unavoidable circumstances.

The Sourcing Playbook, Government Guidance on service delivery, including outsourcing, insourcing, mixed economy sourcing and contracting, explains that onerous (or loss making) contracts may be “a possible consequence of getting risk allocation and payment mechanisms wrong. When a contract is publicly designated by a supplier as onerous, this should prompt a root cause analysis and a conversation with the supplier about the options available to address this.”

The Sourcing playbook was produced by the Cabinet Office and published in May 2021. It emphasises that the delivery of public services is a collaborative endeavour involving colleagues from commercial, finance, project delivery, policy and other professions. It captures best practices from across the Government within 11 key policies that all central departments are expected to follow.

For more information see: The Sourcing Playbook.

[edit] Related articles on Designing Buildings Wiki

• CLC urges inclusion of fluctuations provisions in contracts.
• Construction contract.
• Collateral warranties for building design and construction.
• Practical considerations of collateral warranties.
• Recovery of third party losses.
• Sourcing playbook.
• Supply chains in construction.

[edit] External resources

• IASB and IFRS, Onerous Contracts - Costs of Fulfilling a Contract: Amendments to IAS 37.