Percentage-of-Completion vs Completed Contract: Choosing Your Method

Two Ways to Answer One Question

A contractor signs a $900,000 job in October that finishes the following June. How much of that revenue belongs to this year? Every construction accounting method is an answer to that question, and the answer changes what your financial statements say about your business.

Under percentage-of-completion, you recognise revenue as the work is performed. If you have incurred 40% of expected total costs by year end, you recognise 40% of the contract value. Under completed contract, you recognise nothing until the job is finished, then all of it at once.

Same job, same cash, radically different financial statements. One shows a business earning steadily. The other shows nothing for eight months and a spike in June.

How Percentage-of-Completion Actually Works

The standard approach is cost-to-cost. You calculate:

• Percent complete = costs incurred to date ÷ total estimated costs
• Revenue earned = percent complete × total contract value
• Over/underbilling = revenue earned compared with what you have billed

Everything turns on that estimate of total cost. If your estimate is wrong, your revenue is wrong, and the error compounds every month until someone catches it. This is why percentage-of-completion demands a job costing system you actually trust — the method is only as honest as the cost data underneath it.

It also demands that you update estimates as conditions change. A job that was going to cost $600,000 and is now tracking to $700,000 needs that revised estimate in the calculation now, not at closeout. Carrying a stale estimate is how contractors report profit for six months on a job that is losing money.

Why Sureties and Lenders Expect It

If you want bonding, this decision is mostly made for you. Sureties want percentage-of-completion financials, because completed contract tells them almost nothing about a business mid-cycle. A balance sheet showing four unfinished jobs and no recognised revenue cannot be underwritten.

The same applies to lenders assessing a line of credit, and increasingly to general contractors vetting subs. Percentage-of-completion is the language construction finance is conducted in. Producing it is not bureaucratic overhead — it is what lets outside parties judge you accurately.

It is also the method that makes a WIP schedule possible in the first place. Over and underbillings only exist as concepts because revenue is being recognised on a curve while billing follows its own schedule.

Where Completed Contract Still Applies

Completed contract has not disappeared. It is simpler, it defers tax, and for certain contractors it is permitted — small contractors under the gross receipts threshold, and home construction contracts, are the common cases. If your jobs are short, your volume modest, and you have no bonding requirement, the simplicity is real.

But understand what you are trading. You lose the ability to see how a job is performing while you can still do something about it. A contractor on completed contract finds out a job lost money when it closes — which is to say, too late.

Book and Tax Do Not Have to Match

This is the part that surprises owners most. You can keep your books on percentage-of-completion for your surety and your own management, and use a different permitted method for tax. Many contractors do exactly that.

The tax rules are their own subject, with thresholds, look-back provisions on long-term contracts, and exceptions that turn on contract length and company size. The practical point is that "which method should I use" is really two questions, and the right answer to one does not settle the other. That decision should be made with your tax professional, with your actual numbers in front of you.

Choosing Deliberately

Most contractors I meet did not choose a method. They inherited one from whoever set up QuickBooks, and it has been running ever since — sometimes a method they are not eligible for, sometimes one that quietly costs them bonding capacity.

Three questions settle it in practice. Do you need bonding, now or within two years? Do your jobs routinely span a year end? Do you need to know how a job is doing before it closes? Two or more yes answers and percentage-of-completion is where you belong, whatever your tax method turns out to be.

If you are not certain which method your books are actually on — and it is more common than you would think for the answer to be "both, inconsistently" — that is worth establishing before your next financial statement goes anywhere. Talk to us and we will work it out from your existing numbers.