Revenue Recognition — Percentage-of-Completion vs. Completed-Contract

Long projects span accounting periods, so when you record revenue matters.

Percentage-of-completion (POC)

Recognize revenue as the job progresses, usually by cost-to-cost: % complete = costs incurred ÷ total estimated costs. Revenue recognized = % complete × contract price. This matches revenue to the work performed and is the standard for most larger contractors.

Completed-contract

Recognize all revenue and cost only when the job finishes. Simpler, sometimes used by small contractors or for short jobs, but it lumps profit into one period and can distort the picture.

Why it matters

POC requires good estimates of total cost (your job costing) — if the estimate is wrong, your reported profit is wrong. It also drives the WIP schedule, covered next. Talk to your CPA about which method fits and what the IRS/lenders expect.

Going Deeper (Intermediate)

The dominant method is percentage-of-completion using cost-to-cost:

• % complete = costs incurred to date ÷ total estimated costs.
• Revenue earned = % complete × contract value.

Example: a $1,000,000 job with $600,000 estimated total cost. You've spent $300,000 → 50% complete → you've earned $500,000 in revenue, regardless of how much you've billed. The difference between earned and billed is over/underbilling.

Advanced / Pro-Level

Where pros (and ASC 606) get precise:

• 606 frames it as transferring control of a performance obligation over time — cost-to-cost is the common input measure.
• Estimate at Completion (EAC) is everything: if total estimated cost rises, your % complete drops and you may have over-recognized — triggering a catch-up adjustment.
• Loss jobs: recognize the entire estimated loss immediately the moment a job is projected to lose money (conservatism) — you don't spread a known loss.
• Front-loaded billing doesn't change earned revenue — only cost progress does.

Practice Challenge

A $2M contract has $1.5M estimated cost. You've incurred $750k. What % complete and revenue have you earned? (Answer: 750k ÷ 1.5M = 50% complete; earned revenue = 50% × $2M = $1,000,000 — independent of what you've billed.)

In Practice

On a year-long job, the completed-contract method shows zero profit for months then a big spike — distorting your picture. Percentage-of-completion spreads it to match the work, which lenders expect.

Common Mistakes to Avoid

• Picking a method without your CPA's input
• Using POC with bad cost estimates (wrong profit)
• Ignoring the tax implications

Takeaway: Percentage-of-completion only works if your cost estimates are solid.

Educational content — not legal, accounting, or licensing advice. Rules vary by state and change; verify with the licensing board and a CPA.