Percentage-of-Completion Method vs. Completed-Contract Method
Accounting for long-term projects can be complex, requiring careful consideration of income and expense recognition. In this month’s blog, we will cover the two common accounting practices used by contractors and the like for large, long-term projects: Percentage-of-Completion Method and the Completed-Contract Method. We understand you might already be scratching your head regarding what those two methods accomplish or what those words even mean, well you’re in luck! Moose Creek Bookkeeping has been guiding businesses just like yours through the complex calculations required to keep your financials accurate and easy to grasp. Let’s take a quick look at the differences between the Percentage-of-Completion Method and the Completed-Contract Method.
The difference between the two methods lies in the timing of income and expense recognition.
Percentage-of-Completion Method:
- This method accurately represents a project’s financial performance by recognizing income and expenses as a percentage as the project progresses.
- Aligns with the matching principle, ensuring that income and expenses are appropriately reconciled in each reporting period.
- Contractors using this method can provide stakeholders with regular updates on the project’s progress.
Completed-Contract Method:
- This method defers the recognition of income and expenses until the project is completed.
- It is more simple which can save time and effort in estimating and tracking completion percentages.
- There is no need for ongoing estimation or tracking of project progress. This reduces the risk of inaccuracies.
- With income and expenses recognized in a single period, the Completed-Contract method can provide financial statements with less volatility (no estimates).
Basically, the Percentage-of-Completion method provides ongoing information about the project’s financial performance throughout its duration. In contrast, the Completed-Contract method provides a more static snapshot of the project’s financials at the time of completion.
While both the Percentage-of-Completion and Completed-Contract methods have their merits, the Percentage-of-Completion method is generally considered better for contractors. It provides accurate income recognition and aligns with industry standards. However, there are a host of variables that can determine which method is right for your business. We are happy to discuss those variables with you in further detail.
Hopefully, this gave you some insight into which method might work best for your company. Please reach out to Moose Creek Bookkeeping with any questions you may have. We always offer a complimentary discovery session to help point you in the right direction.
