What Percentage-of-Completion Accounting Means for Contractors
Sam's List Editorial | 2026-06-23
What Percentage-of-Completion Accounting Means for Contractors A contractor can finish the year with a full pipeline, a fat bank balance, and books that say the business made money — and still be quietly broke. The reason is almost always the same: the books are counting cash instead of counting progress. That gap is exactly what percentage of completion accounting explained correctly is supposed to close. It's the method that ties revenue to the work you've actually done, not to whatever showed up in the bank this month. For most contractors running jobs that span more than a few weeks, it isn't optional — it's the method the IRS and GAAP expect you to use. Here's what that actually means, in plain English, and why getting it wrong caps the one number that decides how big a job you can chase: your bonding line. Percentage of completion accounting, explained: revenue follows the work Cash-basis books treat money as income when it lands. Deposit hits, revenue goes up. Pay a supplier, profit goes down. That's fine for a coffee shop. For a contractor running a nine-month job with a 30% deposit up front, it's a fun-house mirror. Percentage-of-completion fixes this by recognizing revenue as the job progresses . If you're 40% of the way through the work, you book 40% of the contract's revenue — and you match it to the costs you incurred getting there. The progress drives the profit. This is the heart of construction revenue recognition: a half-finished job should show roughly half its profit, not all of it or none of it. The method exists so the income statement tells the truth while the building is still going up. The math is simpler than it sounds: cost-to-cost There's one dominant way to measure "how far along am I," and it's called the cost-to-cost method. The formula: Costs incurred to date ÷ total estimated costs = percent complete. Say a job is contracted at $1,000,000 with $800,000 in total estimated costs. You've spent $400,000 so far. That's $400,000 / $800,000 = 50% complete. So you recognize 50% of the revenue — $500,000 — to date. That's it. Costs you've actually burned, divided by what you expect to burn in total. The percentage that falls out is the percentage of revenue you've earned. Both the tax method under IRC §460 and the GAAP standard, ASC 606, lean on this kind of input measure to decide how much revenue belongs to the period. Why the IRS basically requires percentage-of-completion accounting Under IRC §460, income from a long-term construction contract — generally one that starts in one tax year and finishes in another — must be...
