Percentage of completion
Percentage of completion is an accounting method that recognizes revenue and profit as work progresses on a long-term contract, based on how much of the job is done.
Instead of waiting until a project ends, revenue is recorded in proportion to progress, usually measured by costs incurred compared to total expected costs.
Example
A $500,000 job is expected to cost $400,000. When $200,000 of cost is in, the job is about 50 percent complete, so about $250,000 of revenue is recognized, even if less has been billed.
Common mistake
Mixing methods between jobs or years without a reason. Switching between percentage of completion and completed contract makes results impossible to compare.
How to use it
Estimate total job costs carefully, update them when the job changes, and review percent complete with your bookkeeper every month.
Why the method exists
A long project distorts results if all revenue lands in the month it ends. The months of work look like losses and the final month looks like a windfall. Percentage of completion spreads revenue across the periods where the work actually happened, so monthly statements mean something a lender or surety can rely on.
How progress is measured
The most common approach is cost to cost: costs incurred so far divided by total expected costs. That means the method is only as good as your cost estimates and your job costing. If materials sit on site but are not yet installed, or if estimates are stale, the percentage will be wrong and so will the revenue. Accurate, current job costs are the foundation.
Overbilling and underbilling
What you bill and what you earn are rarely the same in a given month. Billings ahead of earned revenue create an overbilling liability, and earned revenue ahead of billings creates an underbilling asset. These balances appear on the work in progress schedule and keep the income statement honest. Our overbilling and underbilling glossary entry explains both sides.
Choosing a method with your accountant
The alternative, the completed contract method, records revenue only when the job finishes. Which method fits depends on contract length, job size and tax rules that change over time, so the choice belongs with your CPA. What your bookkeeper can guarantee either way is clean, current job costs, which every method depends on.