Oops! Something went wrong while submitting the form.
Get a Demo
See your data in HubiFi < 2 days
Understand the Golden Ratio and its application in design. This guide offers practical tips for using this timeless principle in your creative projects.
Running a business with long-term projects requires a solid understanding of revenue recognition. If you're dealing with multi-year contracts, the traditional approach of recognizing revenue only at the end can lead to a distorted financial picture. Percent completion revenue recognition offers a more accurate and insightful way to track your financial performance by recognizing revenue as you complete stages of a project. This post will demystify percent completion revenue recognition, explaining the various calculation methods, the benefits and challenges, and how it aligns with accounting standards like ASC 606 and IFRS 15. We'll also explore how automation can simplify this often complex process.
Percent completion revenue recognition is an accounting method used to recognize revenue and expenses for long-term projects. Instead of waiting until the project ends, revenue gets recognized as work is completed. This gives a more accurate financial picture, especially for projects spanning multiple years. Think of it as a way to match your financial reporting with the actual progress of your work.
The percentage of completion method ties revenue recognition directly to the progress of your projects. It offers a more realistic view of your financial performance, aligning with the realities of multi-year contracts. This contrasts with methods that only recognize revenue at the very end, which can lead to financial statements that don't reflect the ongoing work. This method provides a clearer, more consistent view of your financial health. For a deeper dive into revenue recognition methods, check out our blog.
This method is particularly useful for long-term projects, especially in industries with extended project timelines. Construction is a prime example, where projects often last several years. Imagine building a bridge: recognizing revenue only after completion wouldn't accurately reflect the ongoing work and resources used. Other industries that benefit from this method include engineering, software development, and any business dealing with long-term contracts and services. For these businesses, the percentage of completion method offers a more accurate and insightful way to track financial performance. If your company regularly manages long-term projects, exploring this method might be beneficial. Learn more about how HubiFi supports these industries through our integrations with leading project management software.
Successfully managing the percentage of completion method can be a game-changer for businesses working on long-term projects. It provides a more accurate reflection of your financial status, which can be crucial for securing financing, making informed business decisions, and attracting investors. However, it requires diligent tracking of costs and progress. Accurately estimating the total project costs and the percentage of completion at each stage is essential for reliable financial reporting. While challenging, the benefits of accurate revenue recognition often outweigh the effort. If you're looking for ways to streamline this process and ensure accuracy, consider automated solutions like those offered by HubiFi. We specialize in helping businesses automate their revenue recognition processes, ensuring compliance and providing real-time financial insights. You can schedule a demo to see how we can help. For more information on pricing, visit our pricing page.
Understanding how to calculate the percentage of completion is key to accurately recognizing revenue. There are three main approaches: Cost-to-Cost, Efforts-Expended, and Units-of-Delivery. Let's break down each one.
The Cost-to-Cost method is the most common approach. It's fairly straightforward: divide the total costs incurred to date by the total estimated costs for the entire project. Multiply that result by 100% to get your percentage of completion. Then, multiply this percentage by the total contract amount to determine the revenue you can recognize. For example, if you’ve spent $50,000 so far on a $100,000 project, you’re 50% complete and can recognize 50% of the project's revenue. This method is widely used because it’s simple to calculate and understand. For more details, explore this guide on the percentage of completion method.
The Efforts-Expended method focuses on the work performed rather than costs. This approach considers factors like labor hours, machine hours, or other relevant metrics to measure progress. You’ll calculate the percentage complete by dividing the efforts expended to date by the total estimated efforts for the project. Similar to the Cost-to-Cost method, you then multiply this percentage by the total contract amount to arrive at the revenue recognized. This method can be useful when costs aren't the best indicator of progress, such as in projects heavily reliant on specialized labor. For more information on various methods, including Efforts-Expended, check out this resource on calculating revenue recognition.
The Units-of-Delivery method is best suited for projects with easily measurable units, like manufacturing or delivering a set quantity of goods. Here, the percentage of completion is determined by dividing the number of units delivered by the total number of units in the contract. This percentage is then multiplied by the total contract amount to calculate the revenue recognized. This method provides a clear and direct way to track progress when deliverables are well-defined. This explanation offers further insights into different percentage of completion calculation methods.
Selecting the right calculation approach depends on the nature of your projects and contracts. For long-term projects with evolving costs and efforts, the Cost-to-Cost or Efforts-Expended methods might be more suitable. For projects with clearly defined deliverables, the Units-of-Delivery method offers a simpler approach. Consider factors like the reliability of cost estimates, the measurability of efforts, and the structure of your contracts when making your decision. This article on the percentage of completion method provides further insights and applications. Remember, consistency is key once you've chosen a method. For tailored solutions and to streamline your revenue recognition process, consider scheduling a demo with HubiFi.
Staying compliant with accounting standards is crucial for long-term business health. This section clarifies how the percentage of completion method aligns with key accounting principles.
The percentage of completion method ties directly into the ASC 606 standard, especially for long-term contracts. ASC 606 provides a framework for revenue recognition, emphasizing that revenue should be recognized as work is completed. This aligns with the core principle of the percentage of completion method, ensuring your revenue reporting accurately reflects project progress.
International companies also need to consider how the percentage of completion method fits within IFRS 15. Similar to ASC 606, IFRS 15 offers guidance on revenue recognition, requiring that revenue be recognized as the entity satisfies a performance obligation. Using the percentage of completion method helps ensure compliance with these international standards, providing a consistent approach to revenue reporting across different regions.
Properly applying the percentage of completion method is essential for maintaining regulatory compliance, especially for businesses with long-term projects. It offers a more accurate view of your financial position by recognizing revenue and expenses as work progresses. This is particularly important for industries with extended project timelines, where recognizing revenue only at the end could distort the financial picture. For a deeper dive, check out our detailed guide on the HubiFi blog. Staying compliant not only helps you avoid penalties but also builds trust with investors and stakeholders.
Using the percentage of completion method affects your financial statements—your income statement, balance sheet, and statement of cash flows. Understanding these impacts helps you make informed business decisions and maintain accurate financial records. Let's break down how this revenue recognition method influences each statement.
The percentage of completion method offers a more accurate financial picture by recognizing revenue and expenses as work progresses. This is especially beneficial for industries with extended project timelines, like construction or engineering. Instead of waiting until the project ends, revenue is recognized incrementally, giving stakeholders a clearer view of the project's profitability at each stage. For a deeper dive into this method, check out our guide to percentage of completion revenue recognition.
The percentage of completion method also has implications for your balance sheet. As revenue is recognized gradually, it impacts accounts like work-in-progress (WIP) and accounts receivable. Tracking the progress of long-term projects and recognizing revenue accordingly is crucial. This provides a more realistic view of your assets and liabilities compared to methods that delay revenue recognition until project completion.
While the percentage of completion method impacts revenue recognition, it's important to remember that it doesn't directly affect cash flow. Cash flow is tied to actual payments received and disbursed. However, using this method can offer a clearer picture of a project's overall profitability, which can help with forecasting and managing cash flow. This, in turn, allows for more informed financial decisions.
By recognizing revenue and expenses as work progresses, the percentage of completion method offers a more realistic view of your financial performance. This aligns with the realities of multi-year contracts and provides greater transparency for investors and other stakeholders. This improved transparency can build trust and confidence in your financial reporting. For businesses looking to streamline their revenue recognition processes and improve financial transparency, consider exploring Hubifi's automated solutions. We offer tools and services designed to help you manage complex revenue recognition scenarios efficiently and accurately.
Getting started with the percentage of completion method requires careful planning and execution. Here’s how to implement this revenue recognition method effectively:
Accurately estimating your total project costs is the first step. This includes direct materials, labor, subcontractors, and any other expenses directly tied to the project. Inaccurate cost estimates will lead to inaccurate revenue recognition, so take your time and consider all potential cost factors. A solid cost estimation process is crucial for a reliable financial picture. For complex projects, consider using specialized software or consulting with cost accounting experts.
Once your project is underway, consistently track and document its progress. This involves measuring completed work against the total project scope. Regular monitoring ensures that your revenue recognition aligns with the actual work performed. Detailed documentation is essential for audits and internal reviews, especially for long-term projects where revenue recognition is tied to the percentage of work completed. Establish clear reporting procedures and maintain organized records throughout the project lifecycle.
Implementing the percentage of completion method comes with its challenges. Changes in project scope, unexpected cost overruns, and difficulties in accurately measuring progress can create complexities. Successfully managing these challenges is key to realizing the benefits of this method, especially for businesses working on long-term projects. Proactively addressing these potential roadblocks—through rigorous change management processes and contingency planning—will lead to smoother implementation and more accurate financial reporting.
Using technology and automation can streamline the implementation of the percentage of completion method. Software solutions can automate cost tracking, progress monitoring, and revenue calculations, reducing manual effort and minimizing errors. Automated solutions offer a more accurate financial picture by recognizing revenue and expenses as work progresses, which is particularly beneficial for industries with extended project timelines. Explore options that integrate with your existing accounting software for a seamless workflow. Consider scheduling a data consultation to discuss how automation can improve your revenue recognition process.
Percentage of completion revenue recognition, while beneficial, requires careful management. Here’s how to minimize risks and ensure accurate reporting:
The percentage of completion method provides a more accurate financial picture than other methods by recognizing revenue as work progresses, which is especially helpful for industries with long project timelines. However, those initial estimates, made at the start of a project, can shift. Regularly review and update your estimated costs and project timelines. As your project evolves, your initial projections might become less accurate. Consistently revisiting your assumptions ensures your revenue recognition stays aligned with the project’s actual progress. This dynamic approach is crucial for maintaining accuracy and compliance with accounting standards.
Consistency is key for reliable financial reporting. Whether you're using the cost-to-cost, efforts-expended, or units-of-delivery method, stick with your chosen approach throughout the project lifecycle. Switching methods mid-stream can distort your financial reporting and make it difficult to track progress accurately. The cost-to-cost method, for example, relies on comparing costs incurred to date against total estimated costs, providing a clear and consistent way to measure progress. Documenting your chosen method and its application ensures transparency and simplifies audits.
Navigating the complexities of percentage of completion revenue recognition can be challenging. Don’t hesitate to consult with a financial expert. They can provide tailored advice, helping you choose the right calculation method, set up proper tracking systems, and ensure your processes align with current accounting standards. This is especially important for long-term projects, like construction, where accurate revenue recognition is critical for financial stability and compliance. Expert guidance can also help you anticipate and mitigate potential risks, keeping your business on track.
Even with the best practices in place, there’s always room for improvement. Regularly evaluate your percentage of completion processes. Look for areas where you can refine your estimations, streamline your tracking, and enhance your reporting. This continuous improvement mindset helps you stay ahead of potential issues and optimize your revenue recognition practices. For mid-sized businesses, mastering the percentage of completion method can be a significant advantage, especially in industries with long-term projects. Investing in robust accounting software and automation tools can further streamline your processes and reduce the risk of errors.
Why is the percentage of completion method better than just waiting until the end of a project to recognize revenue? The percentage of completion method gives you a much clearer picture of your financial health throughout a project, especially a long one. Waiting until the end can create a feast-or-famine scenario in your financial reporting, making it harder to make sound business decisions. Plus, it more accurately reflects the work you've already put in.
Which industries benefit most from using this method? Industries with long-term projects, like construction, engineering, and software development, see the biggest advantages. Any business with extended contracts or multi-year service agreements can also benefit. It really comes down to whether your projects span a significant period and require ongoing resource allocation.
How do I choose the right calculation method (cost-to-cost, efforts-expended, or units-of-delivery)? Consider the nature of your projects and contracts. If costs are a reliable indicator of progress, cost-to-cost might be a good fit. If your projects are labor-intensive, efforts-expended could be more suitable. And if you're delivering a set number of units, the units-of-delivery method is the most straightforward. Think about what best reflects the work you're doing.
What are the biggest challenges with implementing the percentage of completion method, and how can I overcome them? Accurate cost estimation and progress tracking are the biggest hurdles. Unexpected changes in project scope can also throw things off. Invest in robust project management and accounting systems, and establish clear documentation procedures. Don't hesitate to seek expert advice if you need help setting up or managing the process.
How can automation help with percentage of completion revenue recognition? Automation can significantly streamline the process by automating cost tracking, progress monitoring, and revenue calculations. This reduces manual effort, minimizes errors, and frees up your team to focus on other important tasks. Look for software that integrates with your existing systems for a seamless workflow.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
Copyright © 2025 HubiFi | All rights reserved.
