Percentage of completion is the long-term construction contract method that is the most common and generally the best understood of all methods for recording construction contracts.
The best thing about the various construction contract methods is that the names pretty well identify the ideas. Using percentage of completion means you recognize the income or loss on the contract based on the percentage of the contract is completed. If the contract is 37% complete at the end of the year, you recognize 37% of the income or loss on that specific contract. Sounds simple enough.
The percentage complete is based on the costs of the project. If the estimated costs are $100k and you have incurred $37k of costs so far, then you are 37% complete. It is irrelevant how much you have billed for those costs or how you have collected on your billings; it’s just based on the costs to date. It also doesn’t matter what your contract price is. Everything is based on the costs.
So who can use percentage of completion and why would you want to use another method? Anyone with long-term contracts and average gross receipts of more than $25M is required to use percentage of completion method. You probably don’t want to use percentage of completion until you have to since the smaller taxpayers have some better choices available. You will have to keep reading the blog – those better choices are explained in other posts.
Chris Wittich, CPA