Percentage of Completion Method Definition and Examples

The output method measures the results achieved against the total expected contract results. This method uses direct measurements of goods or services transferred to the customer, including units produced/delivered, milestones achieved, and value appraisal. The company must be reasonably assured of collections and capable of reasonably estimating costs and the project completion rate. In case the contracts undertaken are of a short-term nature and the results that will arise are expected not to vary if any of the methods. Dawn Killough is a writer with over 20 years of experience in construction, having worked as a staff accountant, green building advisor, project assistant, and contract administrator. She shares fundamental green building strategies and techniques in her book, Green Building Design 101.

The cash method recognizes revenue when cash is received from clients, and expenses are recorded when they’re paid. Although the cash method might be straightforward, it can delay recording revenue and expenses until the money is earned or paid out. The percentage of completion method is particularly relevant for long-term contracts in industries like construction, where projects completed contract method formula span multiple accounting periods. The completion method entails reporting revenues and expenses on a period-by-period basis, determined by the percentage of contract fulfillment. In short, when you rely on cash basis accounting, you won’t have an accurate way to record profits. This will bring huge fluctuations in results that can make it difficult to accurately job cost.

Definition of Completed Contract Method

The company will report its revenue of $1 million to recognize the two payments for $500,000 that the customer made at the end of the six-month and one-year milestones. The percentage-of-completion method matches revenues, expenses, and progress over the contract term. This avoids front- or back-loading of revenues/expenses into certain periods. This enables systematic revenue and expense recognition over the course of the project. If that same project is expected to bring the business $30,000, multiplying $30,000 by 20% will give the business $6,000. Calculate the percentage of completion and contract revenue recognized for the current accounting year.

• As mentioned, the completed contract method is somewhat similar to the percentage of completion method, but it’s a very simplified version that requires much less admin work.
• The net interest owed is included on the taxpayer’s return for that year, with Form 8697 attached to the return.
• However, it’s best used for small jobs that are relatively short-term or when a project brings an inherent risk to job completion beyond what is typical.
• Instead, you’ll wait until the end of the six months as soon as you complete the contract.
• We’ll review how to use this particular accounting method so that you can determine if it will work well for you and your business’s needs.
• The completed contract method is suitable for projects with significant uncertainties, making it challenging to estimate the percentage of completion or total costs until the project’s end.
• At the end of the sixth month, the company delivered 200 units to the customer.

Virtually every public company follows GAAP, including most construction companies, contracting businesses, or independent contractors that release financial statements. When it comes to recognizing revenue, classifying expenses, or reporting results, accountants rely on GAAP. It requires specialized skills and knowledge that traditional accounting rarely dips into such as work-in-progress (WIP) and retainage. The key difference, however, is that construction accounting requires you to track the financial performance of many distinct jobs at once. Construction accounting methods often involve long-term contracts invoiced on a percentage of completion basis (another concept rarely seen outside of construction—more on this later).

Example of the Completed Contract Method

Meet a Knowify expert on a video screenshare, get your questions answered, and ensure you’re set up for organized, profitable projects with Knowify. Below, we’ll break down each of these methods taking a deeper look at how they operate in a construction or specialty trade setting. With a proper dispute resolution clause in place, contractors, subs, and suppliers can avoid taking their disputes into litigation.

The completed contract method does not require the recording of revenue and expenses on an accrued basis. Instead, revenue and expenses can be reported after the project’s completion. The accrual accounting method recognizes revenue and expenses when they occur, meaning the revenue doesn’t need to be received by the company before accounting for it.