In construction company accounting, the percentage-of-completion method demands meticulous project management to ensure accurate financial reporting and compliance. This involves managing project changes effectively, tracking progress through milestones, and continually updating estimated costs to reflect the project’s financial health. Both methods of POC involve a significant level of estimation of cost to complete a project. Estimates to complete are highly subjective, could be biased, and actual results may differ from estimated results.

By recognizing revenue and expenses progressively, businesses can more effectively manage cash flow.
This provides a more accurate financial picture of a company’s performance, especially for projects spanning multiple accounting periods.
Shortly after the scandal broke, the CEO was forced to resign, and half the Board of Directors stepped down.
Regularly reviewing and refining cost projections throughout the project lifecycle is essential.
This might involve using project management software, regular progress reports, and diligent invoice tracking.
HubiFi’s automated solutions can streamline this process, giving you more time to focus on strategic financial decisions.

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The percentage of completion method falls in line with IFRS 15, which indicates that revenue from performance obligations recognized over a period of time should be based on the percentage of completion. The method recognizes revenues and expenses in proportion to the completeness of the contracted project. In the construction industry, applying the percentage-of-completion method for long-term contract accounting has a direct impact on client and stakeholder relations. When revenues and expenses are recognized systematically over the life of a project, companies can provide reasonable assurance of financial performance to their stakeholders. Comprehensive disclosure ensures that financial users can accurately assess a company’s performance and financial condition through its reporting periods.

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What’s the difference between the percentage of completion and milestone methods? Both methods recognize revenue trial balance over time, but they differ in how they measure progress. The percentage of completion method uses a continuous measure, such as costs incurred compared to total estimated costs, to determine the percentage of the project completed. The milestone method, on the other hand, recognizes revenue at specific predefined points in the project, regardless of the overall percentage of completion. Selecting the appropriate method depends on several factors, including the length and complexity of your projects, the predictability of costs and revenues, and your industry’s specific accounting practices.

Introducing the percentage-of-completion method

It is common for businesses to have multiple entities or joint ventures which have been entered for strategic purposes.
By identifying trends, companies can adjust estimates promptly and maintain accurate financial records.
ASC 606 prescribes revenue recognition for long-term projects to be over time which aligns with the percentage-of-completion methodology and supersedes ASC 605.
It has also been used by defense contractors (think nuclear submarines or aircraft carriers) and software developers whose projects represent a multi-year commitment of resources.
This includes units produced, deliverables completed, milestones achieved, or other tangible outputs that reflect project progress.
Change orders can significantly impact a project’s overall scope, cost, and timeline, negatively affecting financial performance.

It’s vital to incorporate approved change orders into your cost and revenue projections promptly. Failing to do so can lead to cost underestimations and misrepresent project progress. Effectively managing scope creep—those incremental additions to project scope—is equally important. Clear communication with clients and robust project management practices can help mitigate these risks.

When implemented correctly, the percentage of completion methods can enhance transparency, planning, and financial strategy. Choosing the right output metric ensures that the percentage of completion reflects true performance. In jurisdictions with specific tax treatments for long-term contracts, compliance becomes even more critical. Identify the specific contract that qualifies for the percentage of completion method. Ensure the contract terms are clear, and the scope of work, payment schedule, and deliverables are well-defined. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

The percentage of completion (POC) method is an accounting percentage of completion method method used to recognize revenue and expenses for long-term contracts. Instead of waiting until a project finishes, revenue is recognized gradually as work progresses. This provides a more accurate financial picture of a company’s performance, especially for projects spanning multiple accounting periods.

Evaluating your current practices and considering a change can ensure compliance and minimize potential tax issues.
Regularly review and update your project estimates, maintain detailed documentation of all costs and progress, and implement strong internal controls to prevent errors and ensure accuracy.
Software developers also use this method when working on custom projects for clients with multi-year commitments or extensive development cycles.
The recording of these costs in the accounting period they are incurred provides a clear view of the project’s financial health at that specific point in time.
Consistently revisiting and refining your initial estimates ensures your revenue recognition reflects the current reality of your project.

We also explored challenges such as standardizing practices across complex organizations, integrating technology, managing legal compliance, and preparing for audits. If a change order increases the contract value to $11 million and estimated costs to $7.7 million, updated calculations are required. Real-time adjustments ensure that revenue recognition reflects the actual project status. For example, consider a firm engaged in a five-year infrastructure project worth $50 million.