Percentage of Completion vs. Completed Contract Method: Understanding the Difference

Reporting financial performance for long-term construction projects can feel like calling the winner of a marathon before it’s over. The industry relies on two key revenue recognition methods to manage this issue: the percentage of completion method (PCM), which tracks financial progress as it unfolds, and the completed contract method (CCM), which tallies results at project completion. Which one should be used? The appropriate method will depend on the nature of the project.

What Are Construction Revenue Recognition Methods?

Construction revenue recognition methods determine how and when companies record project income and expenses on their financial statements. Compared to other industries, “how” and “when” are particularly important in construction because projects often span multiple accounting periods, making it harder to accurately reflect financial performance during regular reporting periods.

The construction industry primarily uses two revenue recognition methods to recognize revenue:

• The percentage of completion method (PCM), which gradually recognizes revenue as work progresses.
• The completed contract method (CCM), which waits until a project is finished before recognizing any revenue.

The standards for revenue recognition per Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) don’t explicitly use the PCM and CCM terms, but the underlying concepts remain relevant. Under ASC 606 and IFRS 15, PCM aligns closely with “over time” revenue recognition, while CCM is similar to “point-in-time” revenue recognition.

PCM/over-time recognition tends to provide a more current picture of a company’s performance and is often applicable to construction contracts under GAAP. CCM/point-in-time recognition can be used for projects in which it’s hard to reliably estimate progress or costs.

Key Takeaways

• PCM recognizes revenue incrementally as work progresses, while CCM defers all revenue recognition until a project is completed.
• PCM aligns with regulatory guidelines, as long as companies can make reliable estimates of costs and progress, while CCM use is restricted.
• Financial statements look markedly different under each method, affecting everything from period-to-period reporting to stakeholder relationships.
• The ability to make dependable cost and progress estimates is the primary factor in choosing between methods.
• Dedicated construction accounting software can add simplicity to complex revenue recognition processes.

Percentage of Completion Method (PCM) Explained

Long-term construction projects create specific construction accounting challenges that standard revenue recognition approaches struggle to address, from complex contract terms and material price volatility to project delays caused by unpredictable weather patterns. PCM aims to solve these problems by allowing companies to record revenue and expenses throughout a project’s life cycle, rather than deferring everything until completion. To do this, companies note the total contract price (the agreed-upon amount a customer will pay), total estimated costs (project expenses to complete the contract), and costs incurred to date (actual expenses to date).

Using these components, companies can calculate the percentage of work completed and recognize a corresponding portion of the contract’s revenue. For example, if after two years of a four-year project a company has incurred half of its total estimated costs, it would recognize 50% of the total contract revenue (and corresponding costs) at that point in time. This approach gives stakeholders a clear picture of the business’s ongoing financial performance.

Both major accounting frameworks—GAAP and IFRS—have historically endorsed PCM as the preferred method for construction revenue recognition, provided companies can produce reliable estimates of costs and accurately measure progress. Again, under current standards, the term “PCM” isn’t explicitly used, though the concept closely aligns with “over time” revenue recognition of long-term contracts.

Percentage of Completion Method Example

Let’s look at a hypothetical example of how PCM could be applied in practice: A construction firm takes on a $5,400,000 contract to build a multistory office building. The expected duration is three years, with estimated total costs of $4,500,000. After the first year, the firm incurs $1,800,000 in actual costs. The formula to calculate the percentage complete is:

Percentage complete = (Costs incurred to date / Estimated total costs) x 100

In other words, the project is 40% complete ($1,800,000 / $4,500,000 x 100). Next, it’s time to determine how much revenue to recognize. The formula is:

Revenue recognized = Total contract value x PCM

This computes to the company recognizing $2,160,000 in revenue ($5,400,000 x 40%) for the first year, matched with $1,800,000 in expenses. This process would continue in subsequent years until the project’s completion.

Percentage of Completion Method Pros and Cons

PCM offers several advantages for construction companies, including:

• Timely visibility into project performance.
• Consistent financial reporting across accounting periods.
• Improved revenue matching of actual project efforts and costs.
• More accurate financial forecasting.
• Better alignment with how most construction projects actually progress.

However, the method has notable challenges and requirements, such as:

• Sophisticated cost tracking and estimation systems are needed to ensure accuracy.
• Time-consuming revenue adjustments are necessary if estimates prove incorrect.
• Regular, detailed project assessments can disrupt workflows and increase administrative overhead.
• Taxes may be owed before project completion.
• Financial reporting is more complex.

Completed Contract Method (CCM) Explained

CCM defers the recognition of all revenues and expenses associated with a contract until the entire project is fully over. During the course of the project, the company tracks costs and any payments received on its balance sheet, but it doesn’t officially record them as profit or loss in its financial statements until the project is finished. CCM is usually used for projects where final costs and timelines are difficult to estimate, making it particularly relevant to the construction industry.

To use CCM—more specifically, the “point-in-time” recognition approach recognized by the standards bodies—a construction contract has to be relatively short-term, which generally means the project will be completed within a year or less. However, CCM can be used for long-term contracts if the company is genuinely unable to reasonably and dependably estimate project completion progress or the total costs required to complete the project. Private companies generally have more flexibility when using CCM, since they’re not legally required to follow GAAP/IFRS unless mandated by creditors, investors, or other stakeholders.

Completed Contract Method Example

Consider a complex construction project with unique requirements, making it difficult to reliably estimate costs or a timeline. This uncertainty makes it a suitable candidate for CCM.

The company begins work on the project, incurring $1,800,000 in costs during the first year. These expenses are labeled as “construction in progress” on its balance sheet and recorded as an asset. Any payments received from the client are recorded as liabilities under “billings on uncompleted contracts.” No revenue or expense is recognized on the income statement during this year, regardless of how far the project has progressed.

The project continues for two more years, with costs and client payments continuing to be recorded on the balance sheet. Only when the project is completed in the third year does the company recognize the full revenue and all associated costs on its income statement. At this point, both the construction-in-progress asset and billings-on-uncompleted-contract liability are reduced to zero.

If the final contract value is $5,400,000 and the company’s total costs are $4,500,000, these figures would be recognized at completion, resulting in a $900,000 profit ($5,400,000 – $4,500,000). However, these figures would only be known with certainty at the end of the project.

Completed Contract Method Pros and Cons

Though less common than PCM, CCM can be beneficial in appropriate circumstances. Some pros of CCM include:

• Straightforward application due to fewer required estimates during the project.
• Simplified financial reporting during the project’s life cycle.
• Reduced risk of overstated profits and premature revenue recognition.
• Lower likelihood of estimation errors, reducing the need to revise financial statements.
• A clear, final picture of project profitability upon completion.
• Effectively designed for short-term projects or those with significant uncertainties.

That said, CCM has its limitations:

• Potential large fluctuations in reported income between periods.
• Lack of insight into financial performance throughout a project’s duration.
• Not explicitly permitted by IFRS and limited acceptance under GAAP.
• Mismatches between when expenses are incurred and revenue is recognized.
• Difficulty in benchmarking performance against companies using other revenue recognition methods.
• Key performance indicators (KPIs) may not reflect current project status.
• Can be viewed negatively by investors or other stakeholders who prefer steady and predictable earnings.

Percentage of Completion vs. Completed Contract Method: What’s the Difference?

The core distinction between PCM and CCM lies in their fundamental approach to financial reporting. PCM treats construction as an ongoing process, reflecting financial results as they unfold. In contrast, CCM views each project as a single unit that can only be measured upon delivery.

Different philosophies impact financial statements in distinct ways. A company using PCM will show steady activity across reporting periods, with revenue, expenses, and profits flowing through its books as a project progresses. Regular project performance updates are made possible, but accurate progress estimates and cost projections are vital for reliable financial statements and to prevent significant adjustments in future periods.

Companies using CCM present a different financial picture. Their income statements remain largely unchanged during construction, while their balance sheets grow with accumulated costs and customer payments. This creates more certainty in final results but can mask ongoing business activity, especially when managing multiple projects simultaneously.

Another key difference: PCM aligns with GAAP and IFRS preferences, while CCM isn’t explicitly accepted under IFRS and is restricted under GAAP. Private companies not beholden to GAAP or IFRS have more flexibility in choosing their preferred method.

Is the Percentage of Completion or the Completed Contract Method Better?

The question of which method is “better” depends on two factors: regulatory requirements and company circumstances. From a regulatory standpoint:

• Public companies and those adhering to GAAP or IFRS generally must use PCM for long-term contracts when reliable estimates are possible.
• CCM use is restricted under GAAP and not explicitly recognized under IFRS, limiting its application primarily to situations where project estimates aren’t dependable.

For private companies with more flexibility in their accounting choices, PCM’s more accurate representation of ongoing performance over time may be better for companies:

• Seeking to demonstrate consistent revenue streams to investors.
• That want to show current period performance for multiple ongoing projects.
• With reliable cost estimation and project management systems.

CCM, while more limited in its application, can be advantageous for:

• Short-term projects where the administrative burden of PCM outweighs its benefits.
• Highly uncertain projects where cost and timeline estimates are unreliable.
• Companies that prefer a more conservative approach to revenue recognition.

How to Choose the Right Revenue Recognition Method

The most significant determinant in choosing between PCM and CCM is the ability to make reliable estimates. Here’s why:

• Accounting standard requirements: Both GAAP and IFRS emphasize the importance of reliable estimates. If a company cannot make dependable estimates of project costs and progress, it generally cannot use PCM.
• Financial statement accuracy: Using PCM without reliable estimates can lead to inaccurate financial reporting, potentially misleading stakeholders.
• Risk management: Unreliable estimates increase the risk of future adjustments or losses; this can be particularly problematic when using PCM.
• Auditor scrutiny: Auditors pay close attention to the reliability of estimates when reviewing construction company financials, especially when PCM is used.

So when choosing a constructing revenue recognition method, PCM is generally preferred if estimates are reliable, as the method provides a more accurate representation of ongoing business activities. If estimates are not reliable, CCM should be used to avoid potential misstatements and to comply with accounting standards.

In practice, construction companies should regularly assess their ability to make reliable estimates. If a company finds that its historical estimates have been accurate and it has robust systems in place for project cost tracking and progress measurement, it’s more likely to be able to use PCM effectively.

No matter the revenue recognition method, the goal is to provide the most faithful representation of the company’s financial position and performance. When in doubt, consult with accounting professionals to decide on the method that best aligns with both the company’s capabilities and the applicable accounting standards.

Construction Software that Simplifies Accounting

Construction companies face distinct accounting challenges, particularly when managing revenue recognition across different contracts. Each project may require its own accounting approach, and no two contracts are exactly alike. NetSuite Construction ERP helps companies navigate these complexities. Through its cloud-based platform, NetSuite enables companies to manage diverse contract requirements and revenue recognition methods in one system. This centralized approach provides real-time visibility into project financials while helping maintain regulatory compliance.

Beyond these core accounting functions, the platform integrates other essential construction business operations—from project tracking and material planning to labor costs and customer billing—so that financial data can seamlessly flow across all aspects of the business, supporting efficient operations, accurate financial reports, and sustainable growth.

Historically, both major accounting frameworks have endorsed PCM as the preferred method for construction revenue recognition, though it’s now referred to as “over-time” revenue recognition. CCM, which is similar to “point-in-time” revenue recognition, can be used only in particular circumstances, such as when a company can’t reliably estimate project timelines or costs. Both PCM and CCM aim to provide an accurate representation of a firm’s financial position and performance; the right construction accounting software can help make it easier to choose the right method for the right circumstance.

Percentage of Completion vs. Completed Contract Method FAQs

Is the percentage of completion method (PCM) permitted under GAAP?

Yes. Generally Accepted Accounting Principles explicitly accept PCM for construction contracts when companies can make reliable estimates of costs and progress. It’s the preferred method for long-term contracts under current GAAP guidelines.

Is the completed contract method (CCM) permitted under GAAP?

CCM has limited acceptance under Generally Accepted Accounting Principles. It’s generally restricted to short-term projects or situations where companies cannot reliably estimate project costs and progress. Private companies have more flexibility in using CCM than public ones.

Which method of revenue recognition is most used in construction?

The percentage of completion method (PCM)is the most commonly used method in construction, particularly for long-term projects. This reflects both GAAP preferences and the method’s ability to show ongoing financial performance.

Who must use the completed contract method (CCM)?

Companies must use CCM when they cannot dependably estimate project costs or measure completion progress. This typically applies to projects with significant uncertainties or unique challenges that make reliable estimates impossible.

What is the biggest disadvantage of using the percentage of completion method (PCM)?

The main disadvantage of PCM is its reliance on estimates. If cost projections or progress measurements prove inaccurate, companies must adjust their financial statements, which can affect reported profits and stakeholder confidence.