What is percentage of completion accounting?
Percentage of completion is an accounting method that recognizes revenue based on how far along a project is rather than waiting until the job is finished. If you’re a contractor working on a project that spans several months or years, this method matches your revenue to the work you’ve actually completed in each period.
The basic calculation works like this: divide costs incurred to date by total estimated costs for the project. That percentage gets applied to the total contract value to determine how much revenue you should recognize. If you’ve spent $80,000 on a project with total estimated costs of $200,000, you’re 40% complete. On a $300,000 contract, you’d recognize $120,000 in revenue.
This matters because it affects both your financial statements and your taxes. Under POC, you report income as you earn it through work performed, even if the customer hasn’t paid you yet. Your profit and loss statement reflects the economic reality of the project rather than just cash movements.
The alternative is completed contract method, where you wait until the entire job is done to recognize any revenue. That can work for short projects, but for longer jobs it creates distorted financials. You might show a loss in Year 1 while incurring all the costs, then a huge profit in Year 2 when the job closes. That doesn’t help you understand how the business is actually performing.
For tax purposes, large contractors are generally required to use percentage of completion. The IRS considers you a large contractor if your average annual gross receipts exceed $29 million over the prior three years. Smaller contractors often have more flexibility to choose their method, though your accountant should guide that decision based on your specific situation.
The catch is that POC only works if your job costing is accurate. The method depends on knowing your costs to date and your estimated costs at completion. If those numbers are unreliable, your revenue recognition is fiction. Garbage in, garbage out.
This means tracking every cost by project. Labor hours, materials, subcontractor invoices, equipment costs. When estimates change mid-project, you need to update your calculations. A cost overrun doesn’t just hurt your margin. It changes how much revenue you’ve already recognized, which can require adjustments to prior periods.
Working with a bookkeeping service that understands construction accounting makes this manageable. The goal is books that reflect what’s actually happening on your jobs so you can make decisions with real numbers and your tax returns hold up to scrutiny.
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