Percentage of Completion: The Backbone of Construction Financial Management

Key Takeaways:

• The percentage of completion method (PCM) recognizes revenue based on costs incurred to date relative to total estimated costs, giving construction companies a more accurate picture of financial performance over the life of a contract.
• Accurate estimated costs and contract prices are the two most critical inputs driving the entire WIP schedule; if either is wrong, reported revenue, contract assets, and contract liabilities will be unreliable.
• Audit readiness depends on consistent, complete WIP schedules from year to year, with red flags including percentages over 100%, negative percentages, and jobs that disappear between reporting periods.
• Even companies below the revenue threshold for required GAAP reporting can benefit from job costing disciplines to track profitability and strengthen future bidding.
• Bonding companies, banks, and government agencies rely on PCM-based financial statements to evaluate a contractor's financial health, making accuracy a competitive requirement as well as an accounting one.

If you run a construction, engineering, or government contracting company that undergoes an audit or review, the percentage of completion method is not just an accounting requirement. It is the foundation of how your financial statements tell the story of your company's health, capacity, and profitability.

Getting it right matters. Because getting it wrong creates problems that compound across every financial statement, every bonding application, and every bank relationship you have.

How Does the Percentage of Completion Method Work?

The concept is straightforward. You have a contract with a set price, and you estimate what it will cost to complete the work. As you incur costs, you calculate how far along you are: costs incurred to date divided by total estimated costs gives you your percentage complete. That percentage determines how much revenue you recognize.

Take a $1 million job with estimated costs of $750,000. The expected profit is $250,000. As costs are incurred over the life of the contract, revenue recognition follows. Once all $750,000 in costs have been incurred, the job should be complete and all $1 million in revenue recognized.

A long-term contract, for this purpose, is any contract that spans a year-end. A job that starts in November and finishes the following March qualifies. It does not need to be a multi-year project.

Why Estimated Costs and Contract Price Are Critical

Two inputs sit at the center of the entire WIP schedule: the contract price and the total estimated cost. If either number is wrong, everything downstream is wrong. Revenue recognition, contract assets (formerly called under-billings), contract liabilities (formerly called over-billings), and reported profitability all flow from these two figures.

The contract price comes from the bid. Estimating the total cost is where things get more nuanced. Most established contractors have this down to a discipline. They analyze labor, materials, subcontractor costs, and overhead before they ever submit a bid, and by the time a job is complete, actual costs usually land close to what was originally estimated.

But not always. Change orders are the most common variable. A residential renovation might uncover the need for structural reinforcement that adds $25,000 in unexpected cost. On a well-managed job, a change order brings both additional revenue and additional expenses. The contract price and estimated cost both get updated, and the WIP schedule adjusts accordingly.

Cost overruns present a different challenge. When actual costs exceed estimates and the contractor cannot recover additional revenue through a change order, the job moves into a loss position. Under GAAP, companies must accrue for the expected loss as soon as it becomes evident.

Bidding discipline is the first line of defense here. The more precise the original estimate, the fewer surprises down the road.

Why Accurate Job Costing Matters Beyond Compliance

Some companies focus on percentage of completion simply because they have to. Sometimes that is because they have crossed a revenue threshold for tax purposes (average annual gross receipts of more than roughly $30 million, as adjusted for inflation), which can limit eligibility for the small contractor exception. In other cases, it is not a bright-line threshold at all. A company reaches a point where it needs GAAP-basis financial statements to satisfy lenders, debt covenants, bonding requirements, or other third parties, and auditors then require a reliable WIP schedule.

The discipline pays off before it's required.

We recently brought on a smaller client that did not yet need to follow PCM based on their revenue. We started getting them into job costing anyway, because they wanted to understand how their jobs were actually performing. Which projects were profitable? Which were not? What did their margins really look like?

That kind of visibility helps company bid smarter on future work. If you know what a similar job cost you last time, you can estimate the next one with more confidence. Job costing becomes a management tool, not just an accounting exercise. And when that company eventually grows into the GAAP reporting requirement, the transition is far less painful because the tracking discipline is already in place.

Common Pitfalls: What We See During Audits

From an assurance perspective, the most common issues with WIP schedules fall into a few categories.

Prior Year Inconsistencies

When a job appears on both the prior year and current year WIP schedules, the cumulative figures should be consistent. If the prior year schedule shows one amount of revenue recognized to date and the current year schedule shows a different number for the same period, something is wrong.

This usually comes down to recordkeeping errors: someone went back into a prior period and changed something they should not have changed, or the accounting system was not set up to prevent retroactive edits.

Missing Jobs

If a job appeared on the prior year WIP schedule as in progress, it should show up on the current year schedule as either still in progress or completed. When a job simply disappears, that is a red flag. We need to find out what happened: was the contract canceled, was it completed without being recorded, or was it simply lost in the data?

Red Flag Percentages

Any job showing a percentage complete over 100% or a negative percentage does not make mathematical sense. These are immediate indicators that the estimated costs, actual costs, or contract price need to be reviewed. They often point to situations where the contractor does not have a reliable total estimated cost figure, or where costs were coded to the wrong job.

WIP-to-Financial-Statement Reconciliation

Once the WIP schedule is in good shape, the contract asset and contract liability balances need to match the financial statements. Depending on the sophistication of the client's accounting system, this is sometimes an audit adjustment rather than something the client handles on their own.

Bonding, Banking, and Competitive Positioning

For larger construction companies, accurate PCM reporting is not just about compliance. Bonding companies evaluate a contractor's financial statements when deciding whether to issue surety bonds, and how much bonding capacity to extend. Banks look at the same statements when making lending decisions. Government agencies compare contractors' financial reports when awarding contracts.

In all of these situations, the WIP schedule is central.

It shows the company's backlog of work, the profitability of jobs in progress, and the overall pipeline. If those numbers are unreliable because estimated costs were inaccurate or jobs were incompletely reported, the company's ability to compete for new work is directly affected.

How to Get Percentage of Completion Right

The percentage of completion method does more than satisfy a reporting requirement. When it is done well, it gives construction, engineering, and government contracting companies a clear view of where they stand financially, how their jobs are performing, and where they are headed.

The companies that treat it as a core management discipline, not a year-end compliance exercise, are the ones that bid more accurately, manage cash flow more effectively, and present stronger financial statements to bonding companies, lenders, and project owners.

If your company needs help setting up or improving its job costing and WIP reporting processes, contact EisnerAmper's construction industry team to start the conversation.