Understanding Percentage Completion and Completed Contracts

In the construction industry there are two main methods that are used to recognize revenue, Percentage Complete and Completed Contract.  The Percentage Complete method states that the contractor recognizes revenue over the life of the construction contract based on its completion percentage.  Thus meaning that if the contract is 50% complete then you recognize half of the revenues, cost and income.  The Completed Contract method states that all revenues, costs and income are only recognized upon the completion of the construction project.

SOP 81-1 requires that the percentage of completion method be used in lieu of the completed contract method when the following four items are present:

• Reliable estimates that can be made of revenues and costs
• The contract itself gives evidence of both parties’ rights in relation to the product, consideration to be paid and received, and the terms of settlement
• The contract purchaser has the ability and expectation to perform all contractual duties
• The contractor has the same ability and expectation to perform

If the stated contract violates any of the above mentioned criteria or where there is a short duration contract where revenue would not differ by the use of each method, the completed contract method can be used.  If you have any questions regarding the understanding of or the application of these two methods don’t hesitate to contact Baldwin CPAs, PLLC at 1-866-287-9604.  Baldwin CPAs, PLLC has a highly-trained, professional staff that would love to assist you.

posted by Matthew McKirahan