A Quick Guide to Percent of Completion for Long-Term Construction Contracts

9/10/2024 - By Thomas Manteiga, EA

If you're a contractor working on projects that stretch across multiple months or years, you've probably faced the challenge of figuring out how to record revenue and expenses for tax purposes. You may have billed a customer, but does that mean you should recognize the revenue? This is where percent of completion comes in, and it can be a bit tricky to navigate—especially if you're not sure how to connect the costs incurred with the revenue earned. Let’s break it down.

Sometimes contractors have jobs that span from one taxable year to another. Any job that extends from one year – say, December of 2XX1 to January of 2XX2 – is considered a long-term contract. Whenever we have a long-term contract, we need to appropriately record what revenues are earned and what costs paid can be associated with each tax year.

This does not necessarily tie to when the business owner sends a bill to the customer, which can lead to some confusion when it comes to tax time.

The percent complete for a job is determined by the costs put into that job. At the time of bidding, contractors generally have a reasonable estimate of the total costs that will go into the contract – let’s say as an example, John Doe Contracting bids for a job, estimating their total costs will be $1M and charging $1.2M to their customer. Let’s also assume the customer takes that bid and they move forward.

As costs are incurred by that job, the job is considered more and more complete, and the associated revenues are earned accordingly. For example – when 500k of costs are expended on the example job site, the job can be considered 50% complete (since 500k/1M = 50%). Therefore, the contractor should recognize 50% of the revenues as earned, or 50% x 1.2M = 600K.

The contractor may have billed 700k already on the job. If they’ve done so, the excess of 100k (the 700k less 600k) would be considered an overbilling and logged appropriately on the balance sheet.

This is a very high-level walkthrough of percent of completion and omits many technical things – such as overhead allocation, gain/fade analysis, provisions for loss – but this should serve as a good introduction to what percent of completion is. To summarize:percent of completion is the costs expended on a particular contract, divided by the estimated total costs of that contract.

Hopefully, this was helpful for you! Feel free to reach out to our construction team with any questions you may have – we are always ready and willing to help.

About the Author | Thomas Manteiga, EA

Thomas is a manager in the Tax & Accounting Services practice of Saltmarsh, Cleaveland & Gund. He began his career in 2012 and provides tax compliance services to our clients, with a concentration in construction, real estate and high-net-worth individuals. Prior to joining Saltmarsh, Thomas worked as an accountant in various local firms.