Percentage of completion is a revenue recognition method that records revenue and costs as a long-term project is completed over time, rather than waiting until the contract is complete.
For a contractor halfway through a $2 million project, recognizing nothing until completion misrepresents the economic reality of the business in every interim period. Percentage of completion addresses this by recognizing revenue in proportion to the stage of completion, typically measured by costs incurred relative to total estimated costs.
The discipline required is reliable cost-to-complete estimates. The percentage recognized is only as accurate as the underlying job cost data. A business that consistently underestimates remaining costs overstates completion percentage, pulling future revenue forward. In a financing or sale process, revenue recognition methodology on long-term contracts is examined carefully, and businesses that cannot support their completion estimates with documentation are at a disadvantage.
See also: Job Costing · Work in Progress (WIP) · Revenue RecognitionLong-term contract revenue recognition requires rigour that general accounting practices do not always provide. See how Wefinx approaches accounting.