Revenue Recognition: Percentage of Completion Formula Example

In case of long-term contracts, accountants need a basis to apportion the total contract revenue between the multiple accounting periods. Percentage of completion method provides one of those bases, other being full-contract method. Taxable income from a long-term contract is determined under the percentage-of-completion method (Sec. 460(a)). When using the percentage of completion method, it’s important for contractors to revise their estimates anytime changes occur on the job. This ensures the accuracy of their accounting calculations, and helps to avoid cash flow challenges.

Contractors often prefer the completed contract method when it’s tough to estimate the actual costs of a project. It’s also favored when managing multiple projects simultaneously or when a project is short-term. Based on the percentage of completion calculated using cost date we determine than revenue of $62.5 million has been earned (31.25% multiplied by $200 million total contract value). On the other hand based on the engineer’s survey the revenue recognized should be $80 million (40% multiplied by $200 million). This notification of accounting change is referred to as an automatic change because it is considered “automatically” approved. You assume IRS approval during the year and report it after the fact on the tax return.

How the Completed Contract Method (CCM) Works

On 1 January 2011, it won a 3-year contract to construct an intra-city dedicated bus tracks for a total price of $300 million. While joint checks and joint check agreements are common in the construction business, these agreements can actually be entered into… Under the survey method the engineers have provided their judgment of the percentage of work completed and it is 40%. Underbilling is the opposite scenario, when the amount billed to date is less than the recognized revenue.

For example, a project that has estimated costs of $100,000 has incurred $50,000 in costs so far. Dividing the costs ($50,000) into total estimated costs ($100,000), you find that the project is 50% complete. Actual costs paid and cash payments received in 2023 and 2024 are summarized below. Home construction contracts are eligible to use the CCM if at least 80% of the contract costs are related to the construction or improvement of residential units. Qualified costs include land improvements and permanent attachments to residential units—and hotels or motels do not count as residential units. This post covers the certified payroll requirements for contractors working on federal construction projects.

Considerations on the completed contract method

Under CCM accounting, even if cash payments were made or received during the contract period, revenue and costs are not recorded on an organization’s income statement. Conversely, under the completed contract method, the company would not record any revenue or expenses on its income statement until the end of the project. Assuming that the project was finished on time and the customer paid in full, the company would record revenue of $2 million and the expenses for the project at the end of year two. In contrast with percentage of completion, the completed contract method is used to recognize project revenue and costs only when the contract is complete.

Liz has written extensively for the Pennsylvania Institute of Certified Public Accountants and been featured in podcast and video presentations on their platform. Small contractors can use the CCM for contracts related to real property that will be completed in two years or less. We are a subcontractor and the GC we are working for is asking us to sign and notarize progress payment line waivers for amounts they have not paid us for, is this legal?

How To Elect the Completed Contract Method?

It helps figure out how much money is entering and exiting a company treasury during the execution of the project. These are just a few of the HR functions completed contract method formula accounting firms must provide to stay competitive in the talent game. Punch list work might seem minor, but it has an improportionate impact on payment.