Explore BrainMass

Percentage of Completion Method

In accounting for contracts, the basic accounting policy decision is the choice between two generally accepted methods: the percentage-of-completion method including units of delivery and the completed-contract method.1

Percentage-of-completion method: Revenues and gross profit are recognized each period based on the construction progress. Construction costs plus gross profit earned to date are accumulated in an inventory account called Construction in Process, and progress billings are accumulated in a contra inventory account called Billings on Construction in Process

Completed-contract method: revenues and gross profit are recognized only when the contract is completed. Like the percentage of completion method, construction costs are accumulated in an inventory account called Construction in Process, and progress billings are accumulated in a contra inventory account called Billings on Construction in Process. 

According to U.S. GAAP, a company should use the method for recognizing contract earnings that best matches revenues to the worked perform, in the period that that worked is performed. For example, if performance of a contract requires a continuous earning process over more than one period, the percentage of completion method should be used. Conversely, the completed contract method should be used if the performance of a contract requires one critical event (a discrete earnings process), if the continuous earnings process occurs within one period, or if the revenues from a continuous earnings process are not measurable. 

The Percentage of Completion Method

1. Estimating Total Revenues

The main idea behind the percentage-of-completion method is that the total revenues from the contract should be allocated over the different periods during which work was done on the project. In order to allocate total revenues, we first need some idea of what those total revenues are going to be. You might think this would be easy - just look at how much the contract is worth. Nothing in accounting, however, is ever that simple. 

According to U.S. GAAP, in addition to the basic contract price, total revenues also often include items such as contract options, change orders, claims, and contract provisions for penalties and incentive payments, including award fees and performance initiatives. The factors, along with other special contract provisions, must be evaluated (and constantly re-evaluated over the life of the contract) in order to estimate total revenues.2 

2. Estimating Percentage-of-Completion

Once we have an idea of what are total revenues are, we want to know how much of the project was completed each period so we can allocate the total revenues accordingly. Contract managers, or their accountants, typically do this by choosing to measure progress towards completion based on either one input measure or output measure. An input measure is an item such as costs incurred or labour hours worked. An output measure is an item such as tonnes produced, storeys of a building completed, or kilometers of a highway paved. 

Once we choose our unit of measure, we need to estimate the total units that are needed to complete the contract. For example, the most common way to measure progress towards completion is on a cost-to-cost basis. To do this, we need to estimate the total costs that it is going to take to complete the contract. 

We then compare this estimate of total costs to the amount of costs that have been incurred to date to measure the percentage of completion. The formula looks like this:

Costs incurred to date / most recent estimate of total costs = percent complete

3. Finding Revenue to Be Recognized to Date

We then combine our estimate for the total revenues (or in some cases gross profit) of the project with our estimate for the percentage of the project that has been completed to date to get the revenues to be recognized to date:

percent complete x estimated total revenue = revenue to be recognized to date

4. Finding Revenue to Be Recognized this Period

One we know how much revenue should be recognized to date, we subtract revenues that have been previously recognized to find the revenue that we should recognize in this period. We calculated total revenues to be recognized to date (and then subtract revenues previously recognized) so that adjustments for revenue recognition based on changing estimates of total revenues or total cost are recognized in the period that the estimates change. 

Revenue to be recognized to date - revenue recognized in prior periods = current period revenue

Illustration of Percentage-of-Completion Method (Cost-to-Cost Basis)

Here we've provided an example of schedule a contract manager might drawup for a contract in progress. The first section has the accounting information we need to calculate the information we need. The second section shows how we calculate our estimated percentage-of-completion. The third section shows how we use the estimated percentage-of-completion to calculate revenue to be recognized to date, revenue recognized in prior periods, and revenue to be recognized in the current period. 

Journal Entries for Construction Project

Based on the accounting information above, we would record the costs of construction, progress billings and collections as three seperate journal. We would then make two additional entries to rcognize revenue and gross profit. 

You'll notice that in the first set of journal entries we add all of our payments to the inventory account construction in process. When we recognize our revenue and growth profit in the next set of hournal entries, we also add gross profit to construction in process. We close out the construction in process account only when we conclude the contract and send out the final invoice. Our total billings at this date should equal the amount in the construction in process account, which should equal all the costs incurred plus the gross profit on the contract. 

Combining and Segmenting Projects

We refer to the contract in this case as an individual project, or 'profit center.' This means that a contract's revenues and costs are accounted for seperately, and investors can compare the rates of return on this project with other undertakings of the firm and the firm as a whole. Because this is the goal for accounting for a long-term contract as a 'profit center', U.S. GAAP recognizes that in some cases that it may be more useful if more than one contract were combined, and accounted for as one profit center. In opposite circumstances, one contract might encompass different undertakings that would be more accurately portrayed as seperate profit centers. 

When to combine or seperate contracts for accounting requires considerabe judgement; the rules pertaining to which are outlined in FASB's codified accounting standards.3 


1. FASB ASC 605-35-25-1
2. FASB ASC 605-35-25-15
3. FASB ASC 605-35-25

Risks of material misstatement: revenues, inventory

5-34 Risk of material misstatement, assertions Demand is down for your client, a manufacturer of computer components. Backlogs from prior years are down by providing customer financing and they just cut back from three shifts a day to two shifts a day. Press reports indicate competitors are winning customers. Your client's

Indiana Co: percentage-of-completion method 2011

Indiana Co. began a construction project in 2011 that will provide it $165 million when it is completed in 2013. During 2011, Indiana incurred $32 million of costs and estimates an additional $87 million of costs to complete the project. (Do not round your percentage calculated.) Using the percentage-of-completion method, Ind

Determining the Percentage of Completion Method

See *ATTACHED* file for complete details! Some of the numbers and account names are already populated for you. Your job is to complete the remainder of the information (highlighted cells). Do your best to utilize formulas where they are called for rather than just typing the numbers.

Percentage of Completion Method for Syl Co.

See attached Excel file. The following data relates to a construction job started by Syl Co. during 2011: Total contract price 100,000 Actual costs during 2011 20,000 Estimated remaining costs 40,000 Billed to customer during 2011 30,000 Received from customer during 2011 10,000 Under t

Percentage of Completion Method

1)Pan Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2008. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: adjust all tax consequences throu

Dot Point revenue; percentage of completion method; profit on installment sale

1. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as

Percentage of completion method..

XYX Builders contracted to build a high-rise for $14,000,000. Construction began in 2007 and is expected to be completed in 2010. Data for 2007 and 2008 are: 2007 2008 Costs incurred to date $1,800,000 $5,200,000 Estimated costs to complete 7,200,000 4,800,000 XYZ uses the percentage-of-completion method.

Percent-of-Completion Method

Sherman Construction Company was awarded a contract to construct an interchange at the junction of U.S. 66 and Highway 40 at a total contract price of $8,000,000. The estimated total costs to complete the project the were $6,000,000. a. Make the entry to record construction costs of $3,600,000, on construction in process to d

Percentage-of-completion method

Hello, I keep getting confused on how to work this problem, can someone show me how to work this? Problem: A company uses the percentage-of-completion method of accounting. In 2007, The company began work on a contract it had received which provided for a contract price of $15,000,000.

Mauer Construction: Compute Profit or Loss, Percentage of Completion

Completed-Contract Method - Mauer Construction Company, Inc., entered into a firm fixed-price contract with Trillini Clinic on July 1, 2005, to construct a four-story office building. At that time, Mauer estimated that it would take between 2 and 3 years to complete the project. The total contract price for construction of the b

Alpha, Inc

Dear OTA, Please explain with steps. Thanks ALPHA Inc. has provided you with the following financial data for the year ended December 31, 2006. A major creditor has asked for pro forma financial statements for the year ending December 31, 2007. Accounts payable $45500 Accounts receivable 60000 Accumula

Percentage-of-completion method

Jacks Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2005 and completed in 2006. Cost and other data are presented below: 2005 2006 Costs incurred during th


Using Percentage of Sales. Eagle Sports Supply has the following financial statements. Assume that Eagle's assets are proportional to its sales. INCOME STATEMENT, 2003 Sales $ 950 Costs 250 Interest 50 Taxes 150 Net income $ 500 If sales increase by 20 percent in 2004, and the company uses a strict percentage of sales p

Percentage sales method

Use the Percentage Sales method and a 20% increase in sales to forecast Apples' Consolidated Statement of Operations for the period September 26, 1999 through September 25, 2000. Assume a 15% tax rate and restructuring costs of 1% of the new sales figure. Consolidated Statements of Operations For the period September 26, 1