Percentage of Completion Accounting for Contractors, in Plain English

If a nine-month job is recorded only when invoices go out, some months look terrible and others look great, and neither is true. Percentage of completion fixes the timing: revenue follows the work. It is the method most construction financial statements are built on, and the one behind the [WIP schedule](/blog/wip-schedule-contractors).

How the calculation works

1. 1Take the contract price, including approved change orders.
2. 2Divide costs incurred to date by total estimated cost for the job. That ratio is the percent complete.
3. 3Multiply the contract price by the percent complete. That is revenue earned to date.
4. 4Subtract revenue already recognized in earlier periods. The remainder is this period's revenue.

A simple example

Contract price $800,000. Costs to date $300,000, total estimated cost $600,000, so the job is 50 percent complete and earned revenue is $400,000. If $250,000 was recognized through last month, this month recognizes $150,000, regardless of what was invoiced. If you billed $430,000, the extra $30,000 is billings in excess of costs, a liability. If you billed $360,000, the $40,000 gap is costs and earnings in excess of billings, an asset. Neither gap is profit.

How it differs from cash and completed contract

Under cash-basis books, revenue appears when money arrives. Under the completed contract method, revenue and profit appear only when the job finishes. Percentage of completion sits between: it matches revenue to effort, which is why lenders and sureties prefer it for longer jobs. The trade-off is discipline: estimates to complete must be updated, because a wrong estimate moves profit between periods. Our [cash vs accrual accounting](/blog/cash-vs-accrual-accounting-small-business) guide covers the broader choice.

What your books must provide

• Accurate job costing. Every labor hour, material invoice and sub payment posted to the right job and month.
• Current contract values. Change orders recorded when approved, not when paid.
• Honest estimates to complete. Updated monthly with input from the field.
• Consistent overhead treatment. A rule for which shared costs land on jobs, applied the same way every month.

Who decides whether you use it

For financial statements and tax, that is your CPA's call, and tax rules for long-term contracts have their own thresholds and exceptions. What your bookkeeping controls is the input quality: clean, current job costs and contract values, so whichever method applies, the numbers behind it are right. That is the work [Mispar does for contractors](/industries/contractors) every month.

Frequently asked questions

Keep reading

Construction Bookkeeping

WIP Schedule for Contractors: What It Is and How to Build One

A work in progress schedule is the report that tells a contractor which jobs are ahead, which are behind on billing and which are losing money before the job ends.

Contractors

Job Costing for Contractors: What It Is and How to Do It

Job costing shows which jobs make money and which do not. Plain-English guide for contractors: what to track, simple examples, and common mistakes.

Small Business Tips

Cash vs Accrual Accounting: Which Method Fits Your Small Business?

Cash and accrual accounting differ in one thing: when you record income and expenses. That one difference changes your P&L, your taxes and what your numbers tell you.