Latest Update: October 2026
Long-term contract accounting requires careful evaluation of performance obligations, project progress, and applicable reporting rules. Under US GAAP, ASC 606 governs revenue recognition for contracts with customers, while federal tax rules may permit or require different treatments for qualifying construction contracts. Finance teams should evaluate these requirements separately before finalizing accounting policies.
Answer Snippet
The percentage of completion method recognizes revenue over time when a contract’s performance obligations qualify for over-time recognition. The completed contract method generally defers revenue recognition until the applicable completion point where that method is permitted. The correct treatment depends on the governing accounting framework, contract terms, and relevant recognition criteria.
Key Facts at a Glance
Percentage of completion method: Recognizes qualifying revenue as performance progresses.
Completed contract method: Generally, recognizes revenue when the applicable completion requirements are met, where permitted.
Financial reporting: The timing difference can significantly affect reported revenue, profit, and contract balances.
Cost tracking: Both approaches require reliable project records and appropriate cost allocation.
Compliance: Under US GAAP, ASC 606 determines the timing of revenue recognition. Tax accounting requirements must be assessed separately.
Quick Read
The percentage of completion method can provide a progressive view of qualifying contract performance.
The completed contract approach generally defers revenue recognition until the relevant completion point.
ASC 606 determines whether revenue should be recognized over time or at a point in time.
Reliable project estimates, cost records, and progress measurements are essential.
Financial reporting and tax accounting may require different treatments.
Introduction
A construction project can generate substantial labor, material, equipment, and subcontractor costs months before the customer makes its final payment. If revenue recognition does not reflect the company’s actual performance, reported results can provide a misleading picture of profitability and financial position.
Consider a contractor working on a two-year project. During the first year, the company incurs significant costs, but the project remains unfinished. The accounting treatment determines how qualifying revenue and related costs appear in the financial statements during that period, subject to the applicable recognition requirements.
The choice between the percentage of completion method and the completed contract method is therefore not simply an administrative preference. Finance teams need to assess the contract, establish the appropriate recognition basis, and maintain records that support the reported figures.
What Is the Percentage of Completion Method?
The percentage of completion method is a commonly used term for recognizing qualifying contract revenue as work progresses. Under US GAAP, ASC 606 requires revenue to be recognized over time when the relevant criteria are satisfied. Otherwise, revenue is recognized at a point in time. The standard also requires an appropriate method for measuring progress toward satisfying an over-time performance obligation.
How It Works in Practice
Suppose a contractor has a $2 million contract and estimates total eligible project costs of $1.5 million. By the reporting date, it has incurred $750,000 in eligible costs that appropriately reflect work performed.
If a cost-to-cost input method is suitable, the calculation indicates 50% progress: $750,000 divided by $1.5 million. If this measure faithfully depicts performance, the contractor may recognize $1 million in cumulative revenue, subject to the contract’s terms and applicable accounting requirements.
The calculation needs careful review. Unusual waste, significant inefficiencies, and materials purchased but not yet incorporated into the work may distort progress measurements if they are treated incorrectly. Changes in labor rates, material prices, subcontractor costs, and project scope can also affect expected profitability.
What Is the Completed Contract Method?
The completed contract method generally defers revenue and related profit recognition until the contract reaches the applicable completion point. It may be permitted for certain qualifying contracts under specific tax rules and other applicable accounting frameworks. However, it is not a freely interchangeable alternative to over-time revenue recognition under ASC 606.
How It Works in Practice
Consider a contractor undertaking a $2 million project across two reporting years. Where the completed contract method is permitted, the contractor generally defers contract revenue and profit until the applicable completion criteria are satisfied. Costs incurred during the project must still be accounted for under the relevant rules; they do not automatically remain unrecognized until completion.
This approach can produce uneven reported results. The business may report substantial project-related expenses in one period and recognize significant revenue and profit in a later period. Management therefore needs to understand whether the resulting financial statements accurately communicate the company’s performance and obligations.
Percentage of Completion vs Completed Contract: Key Differences
The main difference is the timing of revenue recognition. That difference affects reported profitability, financial comparisons, forecasting, and the interpretation of project results.
Comparison | Percentage of Completion | Completed Contract |
|---|---|---|
Revenue timing | Over time when recognition criteria are met | Generally at the applicable completion point where permitted |
Profit visibility | Can reflect qualifying performance progressively | Profit may be concentrated in the completion period |
Estimation | Requires appropriate progress measurements and estimates | Requires cost tracking and assessment of completion |
Reporting pattern | Can provide a more continuous view of performance | Can create greater period-to-period fluctuations |
US GAAP | Applies when over-time recognition criteria are satisfied | Not a general alternative when ASC 606 requires over-time recognition |
Tax accounting | Depends on applicable tax requirements | Available for certain qualifying contracts under specific rules |
Neither approach removes the need for accurate cost records. The correct treatment depends on the contract and the rules governing the financial statements or tax return.
Which Accounting Method Applies?
1. Establish the Applicable Accounting Framework
First, determine whether the company prepares financial statements under US GAAP, IFRS, or another framework. Under ASC 606, management evaluates the performance obligations in the contract and determines when control of the promised goods or services transfers to the customer.
A company cannot choose its revenue recognition method simply because it prefers smoother earnings or a simpler close process. The accounting treatment must follow the applicable requirements.
2. Review Contract Terms and Performance Obligations
Examine what the customer has agreed to receive, whether the customer controls an asset as it is created, and what rights each party has if the agreement is terminated. Under ASC 606, over-time recognition may apply when the customer simultaneously receives and consumes benefits, controls the asset as it is created or enhanced, or the asset has no alternative use and the company has an enforceable right to payment for performance completed to date.
Contract terms and enforceable rights can require careful judgment. Similar projects may not receive identical accounting treatment if their underlying arrangements differ.
3. Test the Reliability of Project Estimates
When revenue qualifies for over-time recognition, finance teams need a defensible method of measuring progress. Project budgets, labor records, subcontractor commitments, procurement records, and approved change orders should support the calculations.
If estimated total costs increase from $1.5 million to $1.8 million, the calculated progress and expected margin may change even when the contract price remains fixed. Management should document revised estimates and assess their effect on cumulative revenue and profitability.
4. Assess Tax Requirements Separately
Financial reporting and tax accounting do not necessarily follow the same rules. Under Internal Revenue Code Section 460, the percentage-of-completion method generally applies to covered long-term contracts, subject to statutory exceptions. Certain qualifying construction contracts may use other permitted methods. Eligibility must be assessed against the applicable provisions.
Before filing a return, confirm the contract’s eligibility, relevant exceptions, and any applicable adjustments with a qualified tax professional. A method acceptable for tax purposes does not automatically determine the appropriate treatment in financial statements.
Financial and Operational Implications
Revenue recognition affects more than reported sales. Depending on the contract and billing arrangements, the difference between revenue recognized and amounts billed can affect contract assets, contract liabilities, working capital analysis, and forecasts.
A contractor may recognize revenue before reaching the next contractual billing milestone. Although the project may show a profit, the company could still face a cash shortage when payroll or supplier payments fall due. Conversely, advance billing can generate cash before the related revenue is recognized.
Project accounting also influences month-end close procedures. Finance teams need to reconcile project costs, approved change orders, billing schedules, and progress measurements before finalizing results. Outdated estimates can overstate margins, obscure cost overruns, and weaken forecasts.
The percentage of completion method can provide useful visibility into performance when applied appropriately, but it depends on reliable estimates and consistent controls. Where the completed contract method is permitted, management should also understand the resulting timing differences and their effects on financial comparisons.
Common Mistakes to Avoid
One common error is treating all costs incurred as evidence of completed work. Materials purchased but not installed, unusual waste, and significant inefficiencies may require special consideration when measuring progress.
Another mistake is failing to revise total cost estimates when project conditions change. Delayed updates can leave reported margins disconnected from the latest supplier prices, labor requirements, and subcontractor commitments.
Companies should also avoid confusing invoicing with revenue recognition. Billing schedules and cash receipts do not automatically determine accounting revenue. Documented policies, consistent reviews, and reconciliations help keep project reporting reliable.
How Fresnel Partners Helps
Accurate contract accounting depends on reliable project records, consistent review procedures, and timely financial reporting. Fresnel Partners supports businesses in strengthening the accounting workflows behind their financial statements, helping finance leaders identify reporting issues and improve visibility into project performance.
Improving Project Cost Visibility
Fresnel Partners supports processes for organizing project expenses, reviewing cost allocations, reconciling supporting records, and identifying inconsistencies between budgets and actual results. Clearer cost information helps management investigate overruns and determine when project forecasts need updating.
Supporting Accurate Financial Reporting
Consistent reporting procedures help finance teams maintain supporting documentation, apply established accounting policies, and improve period-end close activities. Fresnel Partners helps strengthen these workflows so financial information is better organized and easier to review.
Conclusion
Selecting the right accounting treatment for long-term contracts requires a clear understanding of performance obligations, contract terms, and applicable reporting rules. Reliable cost estimates and documented judgments help ensure that financial statements reflect the company’s actual performance.
Finance leaders should review their contract accounting policies before the next reporting cycle, particularly when project costs or delivery schedules change. A disciplined approach can reduce avoidable adjustments and give management a stronger basis for forecasting, project oversight, and financial planning.
Frequently Asked Questions
No. Under US GAAP, ASC 606 determines whether revenue must be recognized over time or at a point in time. The completed contract method is not a general alternative when the applicable requirements call for over-time recognition. Tax rules may allow different treatments for qualifying contracts, so companies should assess their financial reporting policies and tax obligations separately.
When an appropriate cost-to-cost input method is used, eligible costs incurred to date are compared with estimated total eligible costs. The resulting measure is applied to the contract’s transaction price to calculate cumulative revenue, subject to the applicable requirements. Finance teams must ensure that the costs included genuinely reflect performance and review estimates regularly as project conditions change.
Higher estimated costs can reduce expected contract profitability and change the measured progress under a cost-based approach. Finance teams should update project forecasts, assess the effect on cumulative revenue and profit, and evaluate whether additional accounting requirements apply. Revised budgets, supplier quotes, labor estimates, and approved change orders provide useful supporting evidence for these adjustments.
No. Revenue deferral does not automatically justify deferring every project expense. Costs must be evaluated under the applicable accounting requirements to determine whether they should be expensed as incurred or qualify for recognition as assets. Accurate cost tracking remains necessary throughout the project, even when revenue and profit recognition occur at a later date.
Yes. Financial reporting and tax accounting follow different requirements, and a method permitted for one purpose may not be appropriate for the other. Certain qualifying contracts may be eligible for specific tax treatments or exceptions. Businesses should review the applicable provisions, maintain supporting documentation, and identify any required book-to-tax adjustments with qualified accounting and tax professionals.
What’s Next?
Long-term contract accounting requires more than tracking project expenses and comparing them with the original budget. Finance teams need consistent cost information, documented accounting judgments, and reliable reporting procedures to understand project profitability and maintain compliance. Fresnel Partners helps businesses strengthen accounting
Author Profile
- Daniel (“Dan”) T. Jones, CPA has been in finance and management for over forty years. Dan along with Paul Clough founded Fresnel Partners in 2011. Dan provides business, tax and financial planning, and management advisory services to privately owned growth companies, their owners, and high-wealth individuals. Mr. Jones’s clients include businesses ranging from start-ups to $50 million in revenue in a variety of industries including manufacturing and wholesale, retail, contracting, real estate, and professional services.
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