SUMMARYThis study presents a framework for the development of polygon elements based on the scaled boundary FEM. Underpinning this study is the development of generalized scaled boundary shape functions valid for any n‐sided polygon. These shape functions are continuous inside each polygon and across adjacent polygons. For uncracked polygons, the shape functions are linearly complete. For cracked polygons, the shape functions reproduce the square‐root singularity and the higher‐order terms in the Williams eigenfunction expansion. This allows the singular stress field in the vicinity of the crack tip to be represented accurately. Using these shape functions, a novel‐scaled boundary polygon formulation that captures the heterogeneous material response observed in functionally graded materials is developed. The stiffness matrix in each polygon is derived from the principle of virtual work using the scaled boundary shape functions. The material heterogeneity is approximated in each polygon by a polynomial surface in scaled boundary coordinates. The intrinsic properties of the scaled boundary shape functions enable accurate computation of stress intensity factors in cracked functionally graded materials directly from their definitions. The new formulation is validated, and its salient features are demonstrated, using five numerical benchmarks. Copyright © 2014 John Wiley & Sons, Ltd.