Construction projects rarely fit neatly inside one reporting period. Cash received, costs incurred, and work completed can occur at different times, making a cash-basis view an unreliable measure of project performance.
Percentage of completion accounting recognizes contract revenue and expenses as work progresses, using measurable project progress rather than waiting until the entire contract ends. The method helps contractors connect reported income to job performance and produce more useful WIP schedules.
The approach depends on reliable cost tracking, current estimates, and a clear understanding of the contract. The right method can improve financial visibility for owners, project managers, lenders, and sureties. Start with the definition, purpose, and accounting context before reviewing the calculations behind it.
What Is Percentage of Completion Accounting?
Percentage of completion accounting recognizes revenue and expenses as a long-term construction contract progresses. Instead of waiting until the final payment or project closeout, a contractor records the portion of contract activity completed during each accounting period. The method gives owners a clearer view of project performance while work is still underway.
This approach most often applies to construction contracts spanning more than one year. The contractor estimates total contract costs, measures progress, and recognizes the related share of contract revenue and expenses. Accurate job costing matters because changes in expected costs can change the completion percentage and the amount recognized in the current period. The accounting for construction companies requires this connection between project activity and financial reporting.
ASC 606 established a five-step revenue recognition model, but it did not eliminate over-time recognition for qualifying long-term contracts. Contractors still need to determine whether the performance obligation is satisfied over time and select a method that faithfully measures progress. The IRS also describes percentage of completion as reporting income in proportion to the percentage of the contract completed during the tax year.
Percentage of completion compared with completed contract
The completed-contract method defers most revenue and expenses until the contract is substantially finished. Percentage of completion spreads recognition across the project timeline. The right treatment depends on the contract, applicable accounting rules, and tax requirements. A construction CPA can help evaluate the facts before a contractor chooses or applies a method.
| Dimension | Percentage of completion | Completed-contract method |
|---|---|---|
| When revenue is recognized | Over the contract based on progress achieved each period. | Primarily when the contract is completed or substantially complete. |
| Best suited for | Long-term contracts where progress and costs can be measured reliably. | Eligible contracts where reliable progress measurement is not available or the method is otherwise permitted. |
| Impact on financial statements | Produces a steadier view of revenue, expenses, and project profitability over time. | Can defer significant revenue and profit, creating larger changes at project completion. |
| Lender and surety preference | Often supports current WIP reporting and a clearer view of job risk. | May provide less timely information about in-progress job performance. |
Reliable WIP reporting depends on current costs, realistic estimates, and consistent project records. Review construction contractor accounting practices alongside the contract terms, reporting requirements, and the business’s broader financial plan.
How to Calculate Percentage of Completion
The cost-to-cost method measures progress by comparing project costs incurred with the total costs estimated for the contract. It works best when a contractor maintains current job cost records and updates the estimate as the project develops.
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1. Add costs incurred to date
Start with the costs recorded for the project through the reporting date. Include costs that relate directly to the work, such as labor, materials, subcontractors, and other job expenses. Accurate construction job costing gives the calculation a reliable starting point.
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2. Determine the total estimated cost
Use the latest estimate of the project’s full cost, not only the original bid or budget. Review remaining labor, materials, subcontractor commitments, and approved scope changes. An outdated estimate can make a project appear farther along than it is.
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3. Apply the cost-to-cost formula
Divide costs incurred to date by total estimated costs, then multiply the result by 100:
(Total costs incurred to date / Total estimated costs) x 100 = percentage complete
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4. Apply the completion percentage to contract revenue
Assume a contractor has spent $300,000 on a project with total estimated costs of $1,000,000. The calculation is $300,000 / $1,000,000 x 100, or 30% complete. Under the percentage of completion method, the contractor generally recognizes 30% of the contract’s total revenue to date, subject to the applicable accounting guidance and adjustments.
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5. Recalculate as the project changes
Update the calculation at each reporting period. New costs, revised completion estimates, change orders, and unexpected production issues can change the percentage. Compare the resulting revenue with progress billings and the work-in-progress schedule so the financial statements reflect current project conditions.
Cost-to-cost is not the only way to measure progress. An efforts-expended method may use labor hours or machine hours when those inputs track performance. A units-of-delivery method may fit contracts measured by completed units, such as delivered homes or installed equipment. The method should match how the contractor can measure performance consistently and support the calculation with dependable records.
Why Percentage of Completion Matters for Contractors
Construction contractors need financial reports that show how each project is performing, not simply how much cash entered or left the business. Percentage of completion accounting connects reported revenue and expenses to the work completed during the reporting period. That timing gives owners a clearer view of project performance across long-term contracts.
WIP schedules give lenders and sureties reliable project data
A current Work-In-Progress (WIP) schedule shows contract value, costs incurred, estimated costs to complete, billings, recognized revenue, and projected profit for active jobs. Percentage of completion accounting supports this reporting by tying financial results to measurable project progress.
Lenders and sureties rely on accurate WIP schedules when assessing contractor risk, bonding capacity, and financial strength. Reliable job-level data helps them evaluate whether projected profits remain realistic and whether a contractor has enough financial control to take on additional work. Project managers and owners also use WIP reporting to identify margin changes early and address cost or schedule pressure before it affects the broader business. See LedgerWay’s construction contractor accounting guidance for more on construction-specific financial reporting.
Percentage of completion improves cash flow visibility
Multi-year projects can create a gap between the timing of costs, billings, collections, and completed work. Cash may arrive in one period because of a progress billing, even though the related work will continue for months. Cash-basis reports can make that period look unusually strong, then make the next period look weak when costs continue but collections slow.
Percentage of completion accounting places revenue and expenses closer to the progress that generated them. Owners can compare recognized revenue with costs incurred, forecast remaining cash needs, and plan around upcoming labor, materials, subcontractor, and equipment demands. The result is a more useful operating view than a bank balance alone.
Cash-basis reports can hide long-term project profitability
Traditional cash-basis accounting often fails to reflect the true profitability and revenue generation of long-term construction projects. A contractor may collect a deposit before meaningful work begins or pay for materials well before installation. Neither cash event, viewed alone, explains the project’s actual performance.
Accurate construction job costing provides the foundation for dependable percentage of completion reporting. LedgerWay supports contractors with job costing and WIP reporting designed around construction operations, helping owners turn project data into clearer financial decisions.
Compliance Requirements and Common Pitfalls
Contractors need to align the revenue recognition method with the contract, tax rules, and the quality of project data. Under IRC Section 460, contractors with average annual gross receipts above $32 million. Measured over a three-year lookback for tax year 2026, generally must use the percentage of completion method for qualifying long-term contracts. Review the current IRS construction guidance for the applicable requirements and exceptions.
That threshold does not make compliance a once-a-year exercise. The percentage of completion method matches contract income with project progress. So changes in expected costs can affect the percentage complete and the revenue recognized in the current period. Accurate cost estimation is critical under IRS guidance because the estimate forms part of the calculation itself. IRS construction industry guidance provides the governing reference for these rules.
Inaccurate cost estimates distort the calculation
The cost-to-cost approach compares costs incurred with total estimated contract costs. An estimate that omits committed costs, understates labor needs, or fails to reflect approved scope changes can make a project appear further along than it is. The result may be premature revenue recognition or an understated loss forecast. Update estimates when project conditions change, and document the assumptions behind material revisions.
Stale WIP schedules hide project changes
A WIP schedule should reflect current job costs, contract value, billings, estimated costs to complete, and the latest progress assessment. Failing to update it regularly weakens the financial picture for owners, project managers, lenders, and sureties. Accurate WIP reporting helps those stakeholders assess job profitability and risk. It also gives management a timely basis for correcting margin, staffing, purchasing, and cash flow decisions.
Do not apply the completed-contract method by default
The completed-contract method defers most contract income and expenses until the project is finished. It may be permitted for some contracts, but it should not replace percentage of completion when IRC Section 460 or another applicable reporting requirement calls for the latter. Applying the wrong method can create inconsistent period reporting and complicate tax work. Confirm the contract classification, eligibility, and required method with a construction accounting professional before making an election or changing treatment.
Strong estimating, regularly refreshed WIP schedules, and documented method decisions keep revenue recognition tied to actual project performance.
How LedgerWay Helps Contractors With Revenue Recognition
Construction contractors need revenue recognition records that reflect the work completed, the costs incurred, and the obligations still ahead. LedgerWay’s team brings decades of experience with construction-specific accounting, helping owners connect project activity to reliable financial reporting. That work begins with the details behind each contract, not a generic bookkeeping process.
Connect job costs to accurate WIP reporting
Job costing gives contractors a clear view of labor, materials, subcontractors, and other costs assigned to each project. Those records support percentage of completion calculations and help keep Work-In-Progress schedules current. Accurate WIP reporting gives owners a better view of job profitability and provides lenders and sureties the information they use to assess project performance and risk. LedgerWay’s construction contractor accounting support brings these connected records into the broader financial picture.
LedgerWay also helps contractors review cost estimates as projects develop. Updated estimates matter because changes in expected costs affect the progress percentage and the amount of revenue recognized in the current period. A consistent review process can surface margin changes early enough for owners to make informed operating decisions.
Prepare the business for the next project stage
Revenue recognition is one part of a contractor’s financial system. Cash flow planning helps owners prepare for payroll, materials, subcontractor obligations, and uneven billing cycles. Bond readiness depends on clear financial statements and dependable WIP schedules. Prevailing wage compliance adds another layer of recordkeeping for contractors working on qualifying public projects. LedgerWay’s construction-focused team helps organize these needs so project accounting supports both daily decisions and larger growth plans.
Contractors can review the firm’s approach to construction accounting services before deciding what level of support fits their operation. LedgerWay serves businesses nationwide through virtual delivery while maintaining an Atlanta presence for clients who value local accessibility. The result is a responsive financial partnership for contractors who need accurate reporting and practical guidance as their work expands.
Frequently Asked Questions
Is percentage of completion accounting required for every construction contract?
No. The appropriate method depends on the contract, applicable accounting rules, and the contractor’s tax and financial reporting requirements. Certain long-term contracts fall under IRC Section 460 and generally require the percentage of completion method. A CPA should review the contract structure and the contractor’s situation before selecting or changing a method. IRS construction industry guidance explains the rules that apply to contracts subject to Section 460.
How often should a contractor update a WIP schedule?
Update the WIP schedule at each reporting period and whenever material project information changes. The schedule should reflect current costs, revised estimates, approved change orders, billings, and the remaining work. Stale estimates can distort recognized revenue and project margins. Accurate WIP reporting also gives lenders and sureties a reliable view of job profitability and risk.
What happens when estimated project costs change?
A change in estimated total costs changes the project’s completion percentage and the amount of revenue recognized for the current period. Review the estimate promptly, document the reason for the change, and update the WIP schedule and job-cost records. Strong cost tracking matters because the cost-to-cost calculation divides costs incurred to date by total estimated contract costs. IRS guidance identifies the cost-to-cost method as the most commonly used approach.
How does percentage of completion differ from the completed contract method?
Percentage of completion recognizes contract revenue and related expenses as work progresses. The completed contract method generally defers recognition until the contract is substantially complete. The right choice depends on the contract and applicable rules, not on which method produces a preferred result. Job costing and timely WIP reviews help the contractor apply the selected method consistently.
Schedule a Consultation for Construction Accounting
Accurate revenue recognition gives construction leaders a clearer view of project performance and supports better financial decisions. Schedule a consultation with LedgerWay to discuss your construction accounting needs. Contact us to get started with a conversation focused on your business.