Percentage of Completion Method
A revenue recognition approach for long-term contracts recording income gradually as work progresses, based on the proportion of costs incurred to total estimated costs.
Percentage of Completion Method
A revenue recognition approach for long-term contracts that records income gradually as work progresses, based on the proportion of costs incurred to total estimated costs, matching revenue to the related efforts and costs.
For example, a construction company with a $10 million contract estimated to cost $8 million would recognize $2.5 million in revenue and $2 million in costs (25% of their respective totals) after incurring $2 million in costs, which represents 25% of the total estimated cost.
This method provides more consistent and representative financial reporting for projects spanning multiple accounting periods by aligning revenue recognition with value creation. It requires reliable estimates of total contract costs and progress toward completion. Common measurement approaches include cost-to-cost (costs incurred relative to total estimated costs), efforts-expended (labor hours or machine hours), or units-of-delivery (physical progress). Under current accounting standards (ASC 606), this method applies to performance obligations satisfied over time when progress can be reasonably measured and there’s an enforceable right to payment for performance completed to date.