An unbilled rupee is a loan to the client

Every quarter, Indian engineering and construction companies publish results in which one large line of the balance sheet passes almost without comment. Under Ind AS 115 it is called a contract asset. Older reports called it unbilled revenue, and on many fabrication floors it is still simply work in progress. Analysts tend to notice it only when it grows faster than revenue, and boards often treat it as a timing difference that will reverse once milestones arrive.

I think that underestimates what the number is. A contract asset is work the client has received, whose value we have recognised, but for which we have no right yet to send an invoice. Until the milestone arrives, we are financing the client. We do it without a credit limit, without an interest rate and, in most companies I know, without anyone having decided to do it. When I joined Ilvara in 2019, contract assets equalled 139 days of revenue. Nobody had approved that much credit to our clients. It had accumulated, one milestone schedule at a time.

What a contract asset actually records

The mechanics matter, so it is worth setting them out. A typical Indian contract for an equipment or plant package pays an advance at award, a large share on delivery of equipment to site, and the remainder on erection, mechanical completion and performance tests. Revenue, meanwhile, is recognised over time as the work progresses, usually measured by the proportion of expected costs already incurred. When cost-based progress runs ahead of the billing milestones, the gap is a contract asset. When the client has paid ahead of the work, the gap reverses into a contract liability.

There is nothing wrong with this accounting. It describes the economics better than waiting for completion would. The difficulty lies in what happens to the gap when a project slows for reasons outside our control. Our equipment may be delivered and erected, but if the client's civil works, power connection or feedstock are late, the completion milestone moves with them. Our revenue stays recognised, our costs stay paid and the cash simply does not come. On four of our Projects sites in 2020, that gap had lasted more than a year.

Two features make this credit worse than an ordinary receivable. The first is that it is conditional. A receivable is a right to be paid; a contract asset is a right to be paid once something else has happened, frequently something the client controls. The second is that it hides inside the margin. A project can report its planned margin throughout its life while consuming twice the working capital its bid assumed, because margin is measured on costs and revenue, and the cost of financing the delay lands in the company's interest line, far from the project manager's report.

Credit without a credit committee

Most industrial companies run a careful process for customer credit. A new customer's limit is approved, its payment record watched and overdue amounts escalated. Yet the same company will sign a contract whose payment schedule implies months of unsecured credit to the client, approved by nobody whose job is credit. The bid team is judged on winning and on margin. The project team is judged on progress and cost. Finance sees the cash consequence a year later, when it can only report it.

At Ilvara we began treating milestone schedules as credit decisions. Every bid now carries a cash curve: month by month, the cumulative cash the contract will consume or release under its payment terms, its bank requirements and our expected progress. The bid committee sees the deepest negative position and how long it lasts, and the cost of financing it at our borrowing rate is charged against the margin before the margin is compared with our hurdle. A contract whose margin looks healthy at 14 per cent can look ordinary at 9 per cent once the credit it implies has been priced.

We also changed the terms we offer. Erection is billed monthly on measured progress, a contract carries a deemed-completion clause if the client's delay exceeds ninety days, and no more than a fifth of the price is left payable after mechanical completion without explicit approval. Some clients refuse those terms, and we have lost tenders because of it. The president of our Projects division predicted that, correctly, and two contracts worth ₹640 crore in 2020 went to competitors who accepted the clients' schedules. I would make the same choice again, because the alternative was to win work whose economics we did not understand.

The old balances needed a different remedy. Contract assets fall under the expected-credit-loss requirements of Ind AS 109 as receivables do, and a balance two years old on a stalled site is not the same asset as one created last month. We aged every balance, negotiated partial billing on three delayed sites and took a ₹38 crore allowance against the fourth. It was an uncomfortable charge in a pandemic year, and I wish we had recognised the problem sooner.

Four questions for a project company's board

By March 2026 our Projects division's contract assets had fallen from ₹520 crore to ₹270 crore while its revenue grew by about a third, and group contract assets stood at 71 days of revenue. Those figures matter less than the habits behind them, and the habits can be tested by any board, including the boards I hope one day to sit on.

The first question is how old the contract assets are. A single total tells a director almost nothing. Balances older than six months and older than a year, shown project by project, tell a director where the company is financing somebody else's delay.

The second is what releases each large balance. If the answer is a milestone the client controls, such as commissioning a plant whose civil works are late, the balance deserves the scrutiny of an overdue receivable, and possibly an allowance.

The third is whether bids are approved on cash as well as margin. A board that sees only margin at bid stage will keep approving contracts whose working capital is set by the client.

The fourth is who is accountable for the credit. If the honest answer is nobody, at least until the balance becomes large, the company's credit policy has a gap the size of its order book.

None of this argues against project businesses, or against generous terms where they are earned. A client with an excellent payment record and a strategic contract may deserve a back-ended schedule, and a company may choose to give it. The point is that the choice should be made, priced and recorded by someone who knows they are extending credit. An unbilled rupee is a loan to the client. A board should know how many it has made, to whom and on what terms.