Key insights
- Choosing the right accounting method can help companies improve their financial health and tax positions; some methods are especially beneficial to certain industries.
- The percentage of completion (POC) accounting method allows companies to recognize revenue as work progresses, aligning financial reporting with actual project activity.
- POC method benefits include smoother revenue streams, improved visibility into project profitability, and better forecasting and resource planning.
Would you benefit from the percentage of completion method?
Choosing the right accounting method can help companies improve their financial health and tax positions.
There are many methods to choose from, with some being especially beneficial to certain industries. For companies such as construction, engineering, architecture, and others dealing in long-term contracts, two common options are the completed contract method (CCM) and the percentage of completion (POC) method.
CCM recognizes revenue when a project is completed. Transitioning to the POC method — particularly using the input method — can offer significant advantages, especially when aligned with ASC 606, the revenue recognition standard issued by the Financial Accounting Standards Board.
Benefits of using the percentage of completion method
The completed contract method often delays revenue recognition and distorts financial performance. In contrast, the POC method allows companies to recognize revenue as work progresses, aligning financial reporting with actual project activity. This may provide:
- Smoother revenue streams — Recognizing revenue and expenses as projects progress provides a more accurate financial picture and helps avoid financial fluctuations.
- Improved visibility into project profitability — This method offers several advantages by providing clarity in revenue flows. For industries with lengthy contracts, this means financial statements reflect ongoing work.
- Better forecasting and resource planning — By tracking project progress, this method improves financial forecasting.
Understanding the input method
Under ASC 606, the input method measures progress based on the effort or resources consumed relative to the total expected inputs. Common inputs include:
- Labor hours incurred
- Costs to date
- Materials used
For example, if 40% of the total estimated labor hours have been incurred, then 40% of the contract revenue can be recognized. This method is especially effective when inputs reliably reflect performance.
Percentage of completion calculation methods
Different industries may apply various methods to calculate the percentage of completion, which method you chose influences financial reporting accuracy. The three primary approaches are:
- Cost-to-cost method — Compares the costs incurred to date to the project's total estimated costs. This method is widely used due to its clear linkage between costs and revenue.
- Efforts expended method — Assesses the work done relative to the total effort expected on the project, measured by labor hours. This method may be favorable for projects where labor is a key component.
- Units of delivery method — Uses the number of completed units versus the total units expected to gauge progress. This method is a good option for projects with definitive output units.
Other approaches include:
- Physical proportion method — Measures actual physical progress (e.g., percentage of structure built); common in construction and infrastructure projects.
- Milestone method — Recognizes revenue when predefined milestones are achieved; often used in consulting, engineering, and software development.
- Output method — Based on tangible outputs delivered to the customer (e.g., reports, modules); useful for service contracts where deliverables are clearly defined.
Percentage of completion calculation methods by industry
Common and example percentage of completion calculation methods by industry include:
| Industry | Typical Contract Type | Sample Progress Measurement Method |
|---|---|---|
| Construction | Fixed-price, cost-plus | Cost-to-cost (actual vs. estimated) |
| Engineering | Design and consulting contracts | Milestones or deliverables |
| Architecture and design | Phased design agreements | Milestones (phase completion) |
Percentage of completion method challenges and common pitfalls
Adopting the POC method isn’t without complications. Key challenges include:
- Inaccurate cost estimates — Underestimating total project costs can lead to premature revenue recognition and later reversals.
- Subcontractor complexity — Projects involving subcontractors may have timing mismatches or unclear deliverables complicating revenue tracking.
- Long-duration projects — Multi-month or multi-year engagements increase the risk of scope changes, delays, and cost overruns.
- System limitations — Many companies lack integrated tools to track time, costs, and progress in real time, making accurate revenue recognition difficult.
Overcoming these challenges requires not just accounting adjustments, but operational improvements across budgeting, forecasting, and project oversight.
Why ASC 606 matters — even without external reporting
Even if a company isn’t subject to external reporting requirements, aligning with ASC 606 offers internal benefits:
- Greater financial transparency
- Improved internal controls
- Enhanced credibility with lenders and investors
Following ASC 606 principles helps firms operate with the same financial discipline as larger, publicly traded organizations.
How CLA can help implement the percentage of completion method
The POC method, when implemented correctly, provides a real-time view of project profitability. Companies can identify underperforming projects early, adjust course midstream, and make more informed business decisions.
Whether you're exploring the transition or ready to implement, CLA can help:
- Evaluate your current revenue recognition and project costing processes
- Provide practical recommendations to allow you to design and implement ASC 606-compliant systems
- Train your team on recommended practices for budgeting and revenue tracking
- Provide ongoing support for compliance and enhancements
Contact us
Explore if your company would benefit from the percentage of completion method. Complete the form below to connect with CLA.