The percentage of completion method is how construction companies recognize revenue as work progresses instead of waiting until a project ends. It drives your WIP schedule, your bonding capacity, and in many cases your tax bill. Here is how the method works, the exact math with a worked example, who is required to use it, and the mistakes that quietly distort contractor financials.
What the percentage of completion method is.
On a long project, waiting until completion to record revenue makes your financials useless: months of costs with no revenue, then one giant revenue spike. The percentage of completion method (POC) fixes this by recognizing revenue in proportion to the work actually performed each period. If a job is 40 percent complete, you have earned 40 percent of the contract value, regardless of what you have billed.
Compare the main alternatives:
- Cash method: revenue when cash arrives. Simple, but tells you nothing about job performance and is unavailable to larger contractors for long-term contracts.
- Completed contract method (CCM): all revenue and profit recognized only when the job finishes. Defers tax, but produces lumpy financials sureties dislike.
- Percentage of completion: revenue recognized as costs are incurred. The standard for GAAP financial statements sureties and banks want, and required for tax on long-term contracts once a contractor outgrows the small contractor exemption.
The formula, step by step.
The standard approach is the cost-to-cost method:
Step 1 — Percent complete = Costs incurred to date ÷ Total estimated costs (costs to date + estimated cost to complete)
Step 2 — Earned revenue = Percent complete × Total contract value
Step 3 — Over/under billing = Billed to date − Earned revenue
The denominator in step 1 is the current best estimate of total cost, not the original budget. This is why the accuracy of your cost-to-complete estimate controls everything downstream.
A worked example with real dollars.
Say you are a Georgia general contractor with a $2,400,000 commercial contract. Your current estimate of total cost is $2,100,000 (a planned gross profit of $300,000). As of month end you have incurred $1,260,000 of cost and billed the owner $1,300,000.
| Percent complete | $1,260,000 ÷ $2,100,000 | 60.0% |
| Earned revenue | 60.0% × $2,400,000 | $1,440,000 |
| Gross profit to date | $1,440,000 − $1,260,000 | $180,000 |
| Billing position | $1,300,000 − $1,440,000 | $140,000 UNDER-billed |
Two things jump out. First, you report $1,440,000 of revenue even though you only billed $1,300,000: the $140,000 difference sits on the balance sheet as an asset (costs and estimated earnings in excess of billings). Second, that under-billing is cash you have earned but not collected. On one job it is a billing lag; across a whole backlog it is a working capital problem sureties will ask about.
Run your own numbers instantly with our free WIP over/under billing calculator.
Who is required to use it.
Two separate rule sets apply. For GAAP financial statements (what sureties and banks want), long-term contract revenue is recognized over time under ASC 606 when the customer controls the asset as it is built, which describes most construction work; the cost-to-cost input method operates much like traditional POC. For federal income tax, IRC Section 460 generally requires POC for long-term contracts, with a major exception: contractors who meet the small contractor exemption (average annual gross receipts under the inflation-adjusted section 448(c) threshold, $31 million for 2025) and whose contracts are expected to finish within two years may use CCM or other permissible methods for those contracts.
Growing contractors crossing the gross receipts threshold face a mandatory accounting method change with real tax consequences. The transition year is one of the highest-leverage moments to have a construction CPA involved, because timing and elections made that year follow you for a decade.
The 4 mistakes that distort POC financials.
1. Stale cost-to-complete estimates
If the CTC has not been updated since the estimate, the percent complete is fiction. Update monthly with your project managers.
2. Unapproved change orders in contract value
Including unapproved change orders inflates the contract and understates percent complete. Track approved and pending change orders separately.
3. Ignoring loss jobs
When total estimated cost exceeds contract value, GAAP requires recognizing the entire projected loss immediately, not spreading it over remaining work. Burying a loss job in the WIP is the fastest way to lose a surety's trust.
4. Profit fade nobody investigates
When the gross profit percentage on a job declines quarter after quarter, underwriters call it fade and treat it as an estimating or project management problem. Track original versus current estimated gross profit on every job, every month.
The bottom line.
Percentage of completion is not an accounting technicality. It is the engine behind every number a surety, banker, or buyer will ever evaluate about your construction company. Get the cost-to-complete discipline right and the rest of the WIP schedule, and the bonding capacity that depends on it, follows.