How Long Does Accounting Software Implementation Typically Take for Mid-Size Companies?
Accounting for long-term construction contracts rarely follows a straight line. Cash comes in unevenly, costs shift, and timelines stretch. That is exactly where the percentage of completion method becomes central.
Rather than waiting until a project ends, contractors recognize revenue as work progresses, aligning financial reporting with actual performance.
Under percentage of completion method revenue recognition, income is recorded based on progress toward completion, most commonly using the cost-to-cost approach. If a contractor incurs half of the total estimated costs, they recognize roughly half of the contract revenue. This approach reflects economic reality more accurately than waiting until the end of a project, particularly for multi-year contracts.
From a compliance standpoint, this method aligns with ASC 606, which emphasizes recognizing revenue as performance obligations are satisfied. Compared to other revenue recognition methods, it provides a clearer, more continuous picture of financial performance. However, it also introduces complexity. Estimates must be updated regularly, and even small changes in projected costs can materially affect reported revenue.
The result is a method that is both informative and demanding. It gives stakeholders a real-time view of profitability, but only if the underlying data is disciplined, timely, and accurate.
One of the most significant advantages of percentage of completion accounting is the visibility it provides into ongoing performance. Contractors are not left guessing whether a project is profitable until the final invoice. Instead, margins emerge over time, allowing leadership to identify issues early.
This becomes especially valuable for firms managing multiple projects simultaneously. A well-maintained work-in-progress schedule shows which jobs are ahead, which are slipping, and where costs are outpacing expectations. That level of insight supports better operational decisions, from reallocating resources to renegotiating change orders.
Under the New Revenue Recognition Standard, this continuous recognition model is not just helpful but expected for most long-term contracts. It ties revenue directly to performance obligations, reinforcing the principle that income should reflect work completed, not cash received.
Still, visibility comes with a catch. The method depends heavily on estimates. If projected costs are understated, revenue may be overstated early in the project, only to reverse later. That can distort financial results and create credibility issues with lenders or stakeholders.
In practice, the firms that benefit most are those that treat forecasting as a discipline, not an afterthought. Regular revisions, tight project management, and coordination between accounting and operations turn this method from a reporting requirement into a strategic tool.
For all its strengths, the percentage of completion method introduces risks that are easy to overlook. The most common is the disconnect between revenue recognized and cash collected. A contractor may show strong earnings on paper while still facing cash constraints due to billing timing or delayed payments.
This often shows up as overbilling or underbilling. When billings exceed recognized revenue, it can signal future margin compression. When revenue outpaces billings, it may indicate that cash has not yet caught up with performance. Both scenarios require careful monitoring and clear communication with project managers.
Change orders are one of the most important variables affecting accuracy under this method. Project costs rarely align perfectly with original estimates, so contractors must revise budgets and forecasts as soon as changes are approved. When change orders are delayed or recorded inconsistently, the percentage complete becomes distorted, which can lead to overstated or understated revenue. Because income recognition is tied to updated contract values and cost estimates, even small timing gaps can compound into larger reporting issues, making close coordination between project teams and accounting essential.
Tax considerations add another layer. The IRS generally requires this method for larger contractors, though exceptions exist for smaller firms and certain residential projects. To qualify for the small contractor exception, contracts must be completed within two years and the contractor must have average gross receipts of 25 million dollars or less over the prior three years. If both conditions are not met, the percentage of completion method is required, reinforcing the need for accurate and timely financial reporting.
Ultimately, success with this method depends on consistency and control. Estimates must be updated promptly when change orders arise. Project data must be reliable. And financial teams must stay closely aligned with field operations.
Done well, the method provides a steady, accurate reflection of business performance. Done poorly, it can create a false sense of profitability that only becomes clear when the project is complete.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Mike Reynolds, partner in charge of Bennett Thrasher’s Financial Reporting & Assurance practice, who has industry experience in Construction, or call us at 770.396.2200.
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