Percentage of Completion Accounting

This is a feature article written by Scott Palka for the Manufacturing Business Technology Publication.

As a CFO I would recommend using the Percentage of Completion (POC) method with construction based projects that extend over the course of several months/years to help recognize contract, job costs and the corresponding revenue over the performance period of the contract.

There are two main ways a business can report long-term contracts. Specific businesses such as homebuilders, architects, commercial developers, or engineering firms, may have long-term contracts. One method is known as the Completed Contract (CC). With this method, revenues and expenses are recorded once the contractor fulfills the terms of the contract. The “Percentage of Completion” method will tie revenue recognition to the incurrence of any job costs (or estimates of an annual completion factor). The POC method is strongly recommended as long as the business can make estimates that are dependable. If a client is selling a fixed price project and they can’t realistically estimate the costs, they have more than an accounting issue.

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