Percentage of Completion vs. Completed Contract Method in Construction Accounting

Introduction

In Australia’s construction industry, two main accounting methods help businesses manage finances and track revenue: the Percentage of Completion method and the Completed Contract method. Each method plays a key role in construction accounting, guiding businesses to accurately report finances and track earned value throughout a project. Understanding the differences between these methods helps construction businesses select the right one based on project size and duration.

Percentage of Completion Method

The Percentage of Completion method is best for long-term projects. It allows businesses to recognize revenue as work progresses. This method provides a more accurate financial view by recognizing revenue in proportion to project completion. For example, if a project is 50% complete, the business recognizes 50% of the total contract value as revenue. This approach helps align project expenses with revenue, following the matching principle. As a result, businesses can better manage cash flow and assess project profitability.

Completed Contract Method

In contrast, the Completed Contract method defers revenue recognition until project completion. This method is often used for shorter projects or those with unpredictable timelines. While simpler, it can create financial reporting challenges. Delaying revenue recognition may cause fluctuations in financial statements. Additionally, the business must plan carefully to avoid cash flow issues since revenue isn’t recognized until the project’s end. This method may introduce risks if delays or extra costs occur.

Choosing the Right Method

The choice between these methods depends on the project’s size and timeline. The Percentage of Completion method benefits larger, long-term projects, as it provides consistent revenue recognition and smooths cash flow. On the other hand, the Completed Contract method works well for shorter projects where the outcome is less predictable.

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By selecting the right method, businesses in building and construction can manage revenue more effectively, improve financial reporting, and enhance project profitability.