Percentage of Completion vs Completed Contract Method: Which Should You Use?

How you recognize revenue on construction projects is one of the most consequential accounting decisions a contractor makes. It affects your income statements, your tax liability, your WIP schedules, your bonding capacity, and your banking relationships. The two primary methods — percentage of completion and completed contract — produce dramatically different financial pictures from the same underlying project data. This guide explains how each method works, when to use each one, and the tax and financial reporting implications you need to understand.

What Is the Percentage of Completion Method?

The percentage of completion method (PCM) recognizes revenue and profit proportionally as work is performed on a long-term contract. Instead of waiting until a project is finished to record the income, you recognize revenue in each accounting period based on the percentage of the project that has been completed.

The fundamental logic is simple: if you have completed 40 percent of a project, you recognize 40 percent of the total expected revenue and 40 percent of the total expected profit for that project. As the project progresses, you recognize additional revenue and profit in each period.

The Cost-to-Cost Formula

The most common way to calculate the percentage of completion is the cost-to-cost method. The formula is:

Percentage Complete = Costs Incurred to Date / Total Estimated Costs at Completion

Once you have the percentage complete, you calculate revenue to recognize:

Revenue to Recognize to Date = Percentage Complete x Total Contract Revenue

The revenue recognized in the current period is the cumulative revenue to date minus the revenue already recognized in prior periods.

Example Calculation

Consider a $2,000,000 contract with total estimated costs of $1,600,000, yielding an expected gross profit of $400,000 (20 percent margin).

At the end of Year 1:

• Costs incurred to date: $640,000
• Percentage complete: $640,000 / $1,600,000 = 40%
• Revenue recognized to date: 40% x $2,000,000 = $800,000
• Gross profit recognized to date: 40% x $400,000 = $160,000

At the end of Year 2:

• Costs incurred to date: $1,200,000
• Percentage complete: $1,200,000 / $1,600,000 = 75%
• Revenue recognized to date: 75% x $2,000,000 = $1,500,000
• Revenue recognized in Year 2: $1,500,000 - $800,000 = $700,000
• Gross profit recognized to date: 75% x $400,000 = $300,000
• Gross profit recognized in Year 2: $300,000 - $160,000 = $140,000

At the end of Year 3 (project complete):

• Final costs: $1,600,000
• Revenue recognized in Year 3: $2,000,000 - $1,500,000 = $500,000
• Gross profit recognized in Year 3: $400,000 - $300,000 = $100,000

The key point: revenue and profit are spread across all three years in proportion to the work completed, giving financial statement readers a realistic picture of performance in each period.

What Happens When Estimates Change?

Construction estimates change constantly. Material prices increase, change orders are added, productivity differs from assumptions, and unforeseen conditions arise. Under the percentage of completion method, you update your estimate of total costs at completion each period and apply the revised percentage to the cumulative revenue calculation.

If your estimated total cost on the project above increases from $1,600,000 to $1,800,000 in Year 2, your margin drops from 20 percent to 10 percent, and the revenue and profit calculations adjust accordingly. The adjustment flows through the current period — you do not go back and restate prior periods.

If revised estimates indicate a loss on the project, the entire expected loss must be recognized immediately in the period the loss becomes apparent — you do not spread the loss over the remaining life of the project.

What Is the Completed Contract Method?

The completed contract method (CCM) defers all revenue and profit recognition until the project is substantially complete. During the construction period, costs are accumulated on the balance sheet as an asset (construction in progress or costs in excess of billings), and billings are accumulated as a liability (billings in excess of costs). No revenue or profit appears on the income statement until the project is done.

How the Completed Contract Method Works

Using the same $2,000,000 contract example:

Year 1:

• Costs incurred: $640,000 (accumulated on balance sheet)
• Billings issued: $700,000 (accumulated on balance sheet)
• Revenue recognized: $0
• Gross profit recognized: $0

Year 2:

• Additional costs incurred: $560,000 (cumulative: $1,200,000)
• Additional billings: $600,000 (cumulative: $1,300,000)
• Revenue recognized: $0
• Gross profit recognized: $0

Year 3 (project complete):

• Final costs: $1,600,000
• Revenue recognized: $2,000,000 (entire contract revenue)
• Gross profit recognized: $400,000 (entire contract profit)

The entire $400,000 profit appears in Year 3. Years 1 and 2 show zero revenue and zero profit from this project on the income statement, even though the company was actively performing work and billing the client throughout.

Exception: Anticipated Losses

Even under the completed contract method, if you know a project is going to result in a loss, you must recognize the full estimated loss immediately in the period it becomes known. You cannot defer losses until completion — only profits can be deferred.

Key Differences Between the Two Methods

The percentage of completion and completed contract methods produce very different financial statements from the same underlying project data. Here is a side-by-side comparison of the key differences:

Revenue timing: PCM recognizes revenue as work progresses. CCM recognizes all revenue at completion.

Profit timing: PCM recognizes profit proportionally during the project. CCM recognizes all profit at completion.

Income statement impact: PCM produces smoother, more consistent income statements that reflect current activity. CCM produces lumpy income statements that spike when projects close and show minimal activity during execution.

Balance sheet impact: Under PCM, the balance sheet shows earned revenue and recognized profit as part of the project's work-in-progress position. Under CCM, the balance sheet accumulates costs and billings without recognizing any profit until completion.

Estimate dependency: PCM requires reliable estimates of total project costs to calculate the percentage complete. If your estimates are unreliable, PCM will produce inaccurate financial statements. CCM does not require periodic cost-to-complete estimates for revenue recognition purposes, making it simpler when reliable estimates are difficult to produce.

Loss recognition: Both methods require immediate recognition of anticipated losses. The difference is only in the timing of profit recognition.

WIP reporting: Both methods use WIP schedules, but the interpretation differs. Under PCM, the WIP schedule shows earned revenue based on completion percentage, and overbillings and underbillings reflect the timing difference between billings and earned revenue. Under CCM, the WIP schedule shows only costs and billings without recognizing any earned revenue, and the over/under billings represent the difference between accumulated costs and accumulated billings.

When to Use Each Method

The choice between percentage of completion and completed contract depends on your project characteristics, your company size, your financial reporting requirements, and your tax situation.

Use Percentage of Completion When:

• Your projects span multiple accounting periods. If your typical project lasts six months or longer, PCM gives a more accurate picture of financial performance during the project. Financial statement readers — including bonding companies, banks, and owners — want to see that you are recognizing revenue and profit as you perform work, not just when projects close.
• You can produce reliable cost estimates. PCM depends on accurate estimates of total costs at completion. If your estimating and project management capabilities are strong enough to produce reasonable estimates that are updated regularly, PCM will produce meaningful financial results.
• Your bonding company requires it. Most surety companies prefer or require the percentage of completion method because it provides a more realistic view of your company's financial performance. Sureties use your WIP schedules to evaluate project-level performance, and PCM-based WIP schedules provide more useful information than CCM-based schedules.
• You need to show consistent earnings. If you are seeking bank financing, bonding capacity increases, or outside investment, PCM produces financial statements that better reflect your earning power. A company with ten active projects looks far more viable when PCM shows $5,000,000 in revenue and $750,000 in gross profit over the past twelve months than when CCM shows $1,200,000 in revenue from the two projects that happened to close during that period.

Use Completed Contract When:

• Your projects are short-duration. If most of your projects are completed within a single accounting period, the difference between PCM and CCM is minimal. A contractor who does residential remodels that last four to eight weeks has little practical need for PCM.
• Your estimates are unreliable. If you cannot produce reasonably accurate cost-to-complete estimates — whether because of the nature of your work, the early stage of your business, or a lack of estimating infrastructure — CCM avoids the risk of recognizing revenue based on faulty percentages.
• You want to defer taxable income. For contractors who qualify (more on this in the tax section below), CCM allows you to defer income tax on a project's profit until the project is complete. This can be a significant cash flow advantage, especially on large projects that span multiple tax years.
• You are a small contractor not required to use PCM. Under current tax rules, certain small contractors are exempt from the requirement to use PCM for tax purposes. If you qualify, CCM can offer tax deferral benefits without the administrative burden of periodic cost-to-complete estimates.

ASC 606 and Revenue Recognition for Construction

ASC 606, Revenue from Contracts with Customers, is the current financial reporting standard that governs how construction companies recognize revenue. It replaced the older construction-specific guidance (ASC 605-35) and applies to all construction contracts reported under GAAP.

The Five-Step Model

ASC 606 uses a five-step framework for revenue recognition:

1. Identify the contract. A construction contract must have commercial substance, be approved by both parties, specify the rights and payment terms, and have probable collectibility.
2. Identify the performance obligations. Each distinct promise in the contract is a separate performance obligation. Most construction contracts contain a single performance obligation — the completed project — because the individual components (foundation, framing, electrical, plumbing) are highly interrelated and do not provide standalone value to the customer.
3. Determine the transaction price. This includes the base contract price plus estimated variable consideration such as incentives, penalties, claims, and expected change orders. The transaction price may need to be constrained if variable consideration is uncertain.
4. Allocate the transaction price. If there are multiple performance obligations, allocate the transaction price based on standalone selling prices. For most construction contracts with a single performance obligation, this step is straightforward.
5. Recognize revenue as performance obligations are satisfied. For construction contracts satisfied over time — which is the majority — revenue is recognized using a measure of progress. The cost-to-cost method (percentage of completion) is the most common measure of progress used by construction companies.

Over Time vs. Point in Time

Under ASC 606, a construction company recognizes revenue over time if any of these criteria are met:

• The customer simultaneously receives and consumes the benefits as the contractor performs (applicable to service-type arrangements)
• The contractor's performance creates or enhances an asset the customer controls (applicable to most construction contracts where work is performed on the customer's property)
• The contractor's performance does not create an asset with alternative use, and the contractor has an enforceable right to payment for performance completed to date

Most construction contracts meet at least one of these criteria, which means revenue is recognized over time using the percentage of completion approach. The completed contract method is generally not permitted under ASC 606 for financial reporting purposes for contracts that meet the over-time criteria.

What This Means for Contractors

For most construction companies, ASC 606 effectively requires the percentage of completion method for financial reporting (GAAP). However, the tax method and the financial reporting method can differ — you can use PCM for your GAAP financial statements (as required by ASC 606) while using CCM or a modified PCM for tax purposes (if you qualify under IRS rules).

This dual-method approach is common in construction and requires careful management of the differences between your book income and your taxable income.

Tax Implications of Each Method

The tax treatment of construction contracts is governed by IRC Section 460 and related IRS regulations. The rules are specific to long-term contracts, and the available methods depend on your company's size and the nature of your contracts.

IRS Requirements for Long-Term Contracts

For tax purposes, a long-term contract is any contract for the manufacture, building, installation, or construction of property that is not completed within the tax year it is started. Under Section 460, the general rule is that long-term contracts must use the percentage of completion method for tax purposes.

The Small Contractor Exception

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly expanded the small contractor exception. Under current rules, contractors who meet the gross receipts test — average annual gross receipts of $29 million or less for the three preceding tax years (adjusted annually for inflation) — are exempt from the requirement to use PCM for tax purposes on contracts expected to be completed within two years.

This means qualifying small contractors can use the completed contract method for tax purposes, deferring income recognition until projects are complete. The tax deferral benefit can be substantial:

• On a two-year project, CCM defers all profit recognition to the year of completion, potentially shifting significant taxable income from Year 1 to Year 2
• If a contractor consistently has projects in progress, CCM creates an ongoing deferral — as each project completes and the deferred income is recognized, new projects are starting and creating new deferrals
• The time value of money benefit is real — delaying a tax payment by one or two years improves cash flow even though the total tax paid over the life of the project is the same

Home Construction Contracts

Contracts for the construction or substantial renovation of dwelling units (residential buildings containing no more than four units) have a separate exception. Home construction contracts can use either CCM or a modified PCM for tax purposes regardless of the contractor's size. The modified percentage of completion method allocates income based on a comparison of costs incurred to the lesser of estimated total costs or 95 percent of estimated total contract price.

Look-Back Rule

Contractors who are required to use PCM for tax purposes are also subject to the look-back rule under Section 460(b)(2). When a long-term contract is completed, the contractor must recalculate the income that should have been reported in each prior year using the actual (not estimated) total contract price and costs. If the recalculation shows that income was understated in a prior year, the contractor owes interest on the deferred tax. If income was overstated, the contractor receives an interest benefit.

The look-back rule adds administrative complexity to PCM for tax purposes. Contractors who qualify for the small contractor exception avoid this requirement by using CCM.

How the Method Affects WIP Reporting and Financial Statements

The revenue recognition method you use fundamentally shapes your financial statements and your WIP schedules. Understanding these differences is important for interpreting your own financial reports and for communicating your financial position to bonding companies, banks, and project owners.

Income Statement Differences

Under PCM, your income statement reflects the revenue earned and profit recognized on all active projects based on their completion percentage. If you have ten active projects at various stages, your monthly income statement shows revenue from all ten based on the work performed that period. This creates a relatively smooth and predictable revenue stream.

Under CCM, your income statement only shows revenue from projects that completed during the period. If only one of your ten projects completed this month, your income statement reflects revenue and profit from that one project only. The other nine contribute nothing to reported income until they complete, even though you are actively performing work and incurring costs on all of them.

Balance Sheet Differences

Under PCM, the balance sheet shows the net position of each project — the difference between earned revenue (based on percentage complete) and billings to date. If earned revenue exceeds billings, the difference appears as an underbilling (a current asset, often called "costs and estimated earnings in excess of billings"). If billings exceed earned revenue, the difference appears as an overbilling (a current liability, often called "billings in excess of costs and estimated earnings").

Under CCM, the balance sheet shows only the difference between accumulated costs and accumulated billings. There is no earned revenue calculation. If costs exceed billings, the difference is an asset. If billings exceed costs, the difference is a liability. These amounts are often larger under CCM than under PCM because no profit is being recognized to offset the billing position.

WIP Schedule Interpretation

A WIP schedule prepared under PCM includes columns for estimated total revenue, estimated total cost, estimated total profit, percentage complete, earned revenue, total billings, and the over/underbilling position. The earned revenue column is what distinguishes a PCM WIP from a CCM WIP — it shows how much revenue the contractor has earned based on the work completed, regardless of how much has been billed.

A WIP schedule under CCM does not include earned revenue or estimated profit recognition. It shows total contract price, total estimated cost, costs to date, billings to date, and the over/under position based purely on costs versus billings. The profit will not appear until the contract completes.

Surety underwriters and bank credit analysts are trained to read both formats, but most prefer PCM because it provides more information about the contractor's current earning power and project-level profitability.

How to Switch Between Methods

Changing your revenue recognition method is not as simple as flipping a switch. It is a change in accounting method that requires careful planning and, for tax purposes, IRS approval.

Switching for Financial Reporting

A change in accounting method for financial reporting purposes under GAAP requires retrospective application — you restate prior period financial statements as if the new method had always been used. This can be a significant undertaking, especially if you are switching from CCM to PCM and need to determine what the percentage of completion was on historical projects.

If you are making the change to comply with ASC 606 (which generally requires over-time revenue recognition for construction contracts), the transition guidance in the standard provides specific rules for how to handle the changeover.

Switching for Tax Purposes

A change in tax accounting method requires filing Form 3115, Application for Change in Accounting Method, with the IRS. The form is filed with your tax return for the year of change. Key considerations include:

• The change must be to a permitted method — you cannot switch to CCM for tax purposes if you do not meet the small contractor exception
• A Section 481(a) adjustment is calculated to account for the cumulative difference between the old method and the new method as of the beginning of the year of change
• The Section 481(a) adjustment is generally spread over four years if it increases income, or recognized entirely in the year of change if it decreases income
• The change is generally made on an automatic consent basis, meaning you do not need advance IRS approval — you file the form and make the change

Given the complexity, switching methods should be done with the guidance of a tax advisor who understands construction accounting. The wrong approach can trigger unexpected tax liabilities or IRS scrutiny.

Impact on Bonding and Bank Relationships

Your revenue recognition method directly affects how surety companies and banks evaluate your financial position. Understanding their perspective helps you present your finances in the strongest possible light.

Bonding Company Perspective

Surety underwriters strongly prefer the percentage of completion method because it provides a more accurate picture of a contractor's current financial performance. Under PCM, the underwriter can see:

• How much revenue and profit the contractor is earning on active projects
• Whether individual projects are profitable or losing money
• The reliability of the contractor's estimating — by comparing estimated versus actual outcomes on completed projects
• The trend in working capital and net worth as projects progress

Under CCM, the underwriter sees a contractor who may be actively performing $10,000,000 in work but reporting minimal income because no projects happened to complete during the period. This makes it harder to evaluate the contractor's true financial condition and can limit bonding capacity.

If you are seeking to increase your bonding program, switching from CCM to PCM (if you are not already using it) is often one of the most impactful changes you can make in how your financial statements are perceived.

Bank Perspective

Banks evaluate construction companies for lines of credit, equipment loans, and project financing. Like sureties, banks prefer financial statements prepared under PCM because they better reflect the contractor's earning capacity and cash flow generation potential.

Banks also care about your WIP schedules and how overbillings and underbillings trend over time. Under PCM, the WIP schedule provides a more nuanced view of your billing position relative to earned revenue. Under CCM, the billing position is measured only against costs, which can make over/underbillings appear more extreme.

Your CFO or financial advisor should understand how your revenue recognition method affects your banking covenants and work with your bank to ensure the financial metrics are interpreted correctly.

How FinTruction Implements Revenue Recognition

At FinTruction, revenue recognition is one of the most critical services we provide to construction clients. We understand that getting this right affects everything — your financial statements, your tax position, your bonding capacity, and your banking relationships.

Our controller services team prepares WIP schedules using the percentage of completion method, working with your project managers to develop accurate cost-to-complete estimates for every active project. We update these estimates monthly and track trends in profitability so you can see how projects are performing in real time.

We coordinate with your tax advisor to manage the differences between your book revenue recognition (typically PCM under ASC 606) and your tax revenue recognition (CCM if you qualify for the small contractor exception). This dual-method approach is standard in construction accounting, and we ensure the book-to-tax differences are properly tracked and documented.

Our CFO services team helps you understand how your revenue recognition method affects your bonding and banking relationships. We prepare your financial packages for surety and bank presentations, ensuring that your WIP schedules, income statements, and balance sheets tell an accurate and complete story.

If you are currently using the completed contract method and considering a switch to percentage of completion — or if you are unsure which method is right for your business — we can help you evaluate the impact and manage the transition.

Not Sure Which Revenue Recognition Method Is Right for Your Construction Business?

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Frequently Asked Questions About Revenue Recognition Methods

Can I use different methods for tax and financial reporting?

Yes. Many construction companies use the percentage of completion method for GAAP financial statements (as required by ASC 606) and the completed contract method for tax returns (if they qualify for the small contractor exception). This dual-method approach is common and permitted, but it requires tracking the differences between book income and taxable income. Your accountant will maintain a schedule of these differences and reconcile them on your tax return.

What happens if my cost-to-complete estimate is wrong?

Under the percentage of completion method, cost-to-complete estimates are updated each period, and the revised estimate affects the current and future periods — not prior periods. If you underestimate costs, your early-period profit recognition will be too high, and later periods will show lower margins or losses as the true costs materialize. If you overestimate costs, early periods will understate profit, and later periods will show a catch-up gain. The accuracy of your estimates determines the reliability of your financial statements under PCM.

Do I have to use percentage of completion for tax purposes?

If your average annual gross receipts exceed the current threshold (approximately $29 million, adjusted for inflation) for the three prior tax years, you are generally required to use the percentage of completion method for tax purposes on long-term contracts. If you are below the threshold, you can use the completed contract method for contracts expected to be completed within two years. Home construction contracts have separate rules that allow CCM regardless of company size. Consult your tax advisor for your specific situation.

How does the method affect my bonding capacity?

Surety companies prefer the percentage of completion method because it provides a more complete picture of your financial performance. Under PCM, your income statement shows revenue and profit from all active projects, demonstrating earning power. Under CCM, income only appears when projects complete, which can make your financial statements look weaker than your actual performance — particularly if you have large projects in progress. Switching from CCM to PCM often results in an immediate improvement in how sureties evaluate your financial position, which can lead to increased bonding capacity.

What is the difference between percentage of completion and input/output methods under ASC 606?

ASC 606 allows two categories of methods to measure progress on performance obligations satisfied over time: input methods and output methods. The cost-to-cost percentage of completion method is an input method — it measures progress based on the costs incurred relative to total expected costs. Output methods measure progress based on results achieved — such as units delivered, milestones reached, or surveys of work performed. For most construction contracts, the cost-to-cost input method is the most practical and commonly used approach because construction costs generally correlate well with the progress of work. Output methods can be appropriate in specific situations, such as when distinct deliverables are identified within a contract.