City Builders (CB) is engaged in a major civil engineering contract which includes a penalty clause that equires payment of damages if the completion of the contract is delayed. Though as at 31 December 2011 (the reporting date) the contract is progressing well, CB fears that as the contract work progresses it may not be able to avoid the obligation to pay the penalty. Accordingly, when preparing the financial Statements for 2011 CB has set up a provision for penalty amounting to £12 million.

Required:

Comment on whether the provision has been set up correctly.