These projects typically involve significant costs spread over time, and recognizing revenue as work progresses provides a more accurate reflection of the project’s financial status. Implementing the percentage of completion method isn’t always straightforward. As Procore explains in their explanation, managing change orders and fluctuating project costs can create complexity. These variations can lead to discrepancies between billing and the revenue you can recognize.
Choosing the Right Construction Accounting Method
This includes maintaining detailed records of all costs incurred, estimated costs to complete, and the progress of each project. Thorough documentation is essential when accounting using the percentage of completion method. Maintaining detailed records of all project-related costs, including materials, labor, and overhead, supports the estimates used in your financial reporting. This documentation not only helps justify your revenue recognition but also proves invaluable during audits.
Industries and Projects Best Suited for This Method
Along with tightly aligned revenue and expenses, other upsides often accompany use of the percentage of completion method. Among the most widely used methods, cost-to-cost divides the total contract percentage of completion method costs incurred to date by the estimated total contract cost. The resulting ratio represents the percentage of total contract revenue that has been earned so far. This method is especially beneficial when you need to buy a substantial portion of materials at the project’s outset. By applying the cost-to-cost method, you can front-load revenue recognition, capturing the largest portion of project revenue in the job’s early stages.
Understanding the percentage of completion accounting method
Milestone billing, on the other hand, will trigger the billing process once predetermined deliverables, or milestones, are hit. For example, a contractor may send an invoice (milestone payments) when they complete the foundation of a structure. The best way to overcome the frustrations of payment chains is to understand the most common construction billing methods. That way you’ll know when and how you can expect to be paid for each project. Don’t let bureaucracy or a lack of knowledge stand in the way of fair compensation. In the construction industry, the payment chain often works like a set of dominoes, with financial burdens falling from one piece to the next.
Construction contract accounting involves applying specific accounting principles to long-term construction projects. The percentage-of-completion method is commonly used to allocate revenues and expenses across the timeline of these complex projects. Also, keep detailed records of all project costs to support your calculations.
