Completion Rate Formula: How to Calculate It Accurately

This is far more representative of the project’s financial status than waiting until the end to book any revenue. As Procore explains in its guide to the percentage of completion method, this approach aligns revenue recognition with the actual progress of the work. For a general contractor managing numerous complex projects, this method becomes essential for accurate financial reporting and informed decision-making.

Integrating with Accounting Software and ERPs

Automation streamlines data entry, minimizes human error, and supports compliance with complex standards such as IFRS 15 or GAAP. By leveraging technology, companies can enhance accuracy, improve transparency, and make more informed decisions throughout the contract’s duration. The percentage of completion method calculates the proportion of revenue and expenses to recognize based on the extent to which the project has been completed during a given period.

• For example, if a project is expected to require 10,000 labor hours and 4,000 hours have been worked so far, the project would show as 40% complete in an ERP software like Intuit Enterprise Suite (IES).
• Let’s consider an example of a construction company that has a contract for a project estimated to bring in a total revenue of $1,000,000.
• However, it requires careful estimates and can be subject to errors or biases if those estimates are off.
• The foundation of the percentage of completion method lies in accurate cost estimations.
• The most common is costs incurred to date, but they can also use units completed or labor hours.

Industry-Specific Adaptations

• Comprehensive disclosure ensures that financial users can accurately assess a company’s performance and financial condition through its reporting periods.
• Red Co., a construction company, is currently engaged in a significant construction project with a total estimated cost of $1,000,000.
• The percentage of completion method recognizes revenue and expenses tied to long-term projects.
• However, revenue cannot exceed the contract value as the contractee will not pay any more than $ 12,00,000.
• This requires clear client communication, meticulous documentation of changes, and a system for incorporating these changes into the revenue recognition process.
• Upon completion, earn a recognized certificate to enhance your career prospects in finance and investment.

You’re knee-deep in a year-long project, making steady progress, Bookkeeping vs. Accounting but your financial statements show zero revenue. Percent complete revenue recognition lets you report income as you work, giving a more accurate reflection of your business’s financial reality. We examined how businesses calculate revenue based on either input or output measures and how this method ensures that financial reporting reflects actual progress. For example, if a company determines that 25 percent of a project is complete, it will recognize 25 percent of the total contract revenue and related expenses.

Completed Contract Method

This section will illustrate the journal entries required over the duration of a construction project using percentage-of-completion. Adhering to standards such as GAAP (Generally Accepted Accounting Principles) and ASC 606 ensures accountability and enhances financial transparency. assets = liabilities + equity Here, the biggest challenge is to calculate the percentage of work completed. He has extensive knowledge of ASC 606 revenue recognition regulations and criteria and more than ten years of expertise in GL accounting, with a strong emphasis on revenue recognition. The answer is by looking at the labor or machine hours completed to date or the amount of materials used.

Construction Accounting: Percentage-of-Completion

You need to reasonably estimate both the total project costs and the percentage of completion method formula project’s overall timeline. This requires a detailed understanding of the project scope, necessary resources, and potential risks that could impact costs or completion. While some uncertainty is inherent in any project, the key is having enough information to develop reliable estimates. For a deeper look into project management and cost estimation, explore our resources on project accounting.

They increase or decrease the amount of revenue recognized on the income statement and create an asset or a liability on the balance sheet. Most construction companies use the cost-to-cost method of percentage of completion accounting. This percentage would then be applied to the total contract value to determine the amount of revenue that can be recognized for the current period. This ongoing process helps maintain the integrity of your financial reporting throughout the project lifecycle. The estimated percent complete method substitutes the formula above with a subjective estimate of the total percentage of the job completed. Because this method relies on a subjective assessment, it’s less precise and can be more prone to error.