How does percentage of completion work?

Definition

Percentage of completion is a way to record revenue as a job gets done, in proportion to how far along the work is. On the books, you earn a slice of the contract price as costs come in, not only on the day you send a bill.

It is an earnings method, not a billing method. The percent tells you how much of the job is finished for the Income Statement.

The usual measure is cost incurred divided by total estimated cost. That fraction, times the contract price, is revenue earned to date.

On the accrual basis, that earned amount hits the Income Statement even if the homeowner has not been billed for it yet. Cash still waits for later collections.

Where it shows up

P&L: Related to revenue earned as the job finishes, not as it is billed.

Balance Sheet: Related to the job asset or liability the earned-versus-billed gap creates.

Cash flow: Related to nothing until billings collect.

See also: Progress Billing · Work In Progress Schedule · Revenue Recognition

When you look at your Income Statement, this method is why kitchen revenue can show up before the final walkthrough. The line is earned revenue, not the last draw you mailed.

When the percent is high, more of the contract has been earned. When it is low, most of the job still sits ahead of you.

The Balance Sheet holds the gap between what you have earned and what you have billed. If you have earned more than you billed, a job asset appears; if you billed more than you earned, a job liability appears.

On the Statement of Cash Flows, earning the percent does nothing to cash. Cash from operations rises only when billings on that job collect.

A remodeler can show healthy earned revenue and still be waiting on a draw. This page is the earnings clock, not the bank balance.

How it works

A typical path starts with a contract price and a cost budget. You need both numbers before the percent means anything.

As work happens, you post job costs. Cost incurred to date is the numerator.

Divide that cost by the current total estimated cost to finish the job. The result is the percent done.

Multiply the percent by the contract price. That product is revenue earned to date.

Subtract what you already recognized in earlier periods. The remainder is this period's revenue.

If the cost budget changes, the percent changes too. A $40,000 budget that becomes $50,000 after a surprise electrical issue drops the percent until more cost is in.

Stay with earned revenue on this page. The stage bill you send when cabinets land is a different event, and it can be larger or smaller than the earned amount.

The gap between earned and billed is what later pages call over-billings or under-billings. You do not need those names to record the earned slice.

When the job is 100 percent done, earned revenue equals the contract price. Later bills only catch up the receivable; they do not create extra sales.

Example

A kitchen remodeler has a $50,000 job. Cost in so far is $20,000, and total estimated cost is $40,000.

Divide: $20,000 by $40,000. The job is 50 percent done.

Fifty percent of the $50,000 contract is $25,000 earned. If nothing was recognized in a prior period, this period's revenue is $25,000.

The shop records:

Debit: Construction in progress $25,000

Credit: Revenue $25,000

Construction in progress, a job asset, and revenue both go up by $25,000. Cash has not moved.

The Income Statement now shows $25,000 of kitchen revenue. The Balance Sheet holds that earned amount in the job account until it is billed and collected.

If the shop had already billed $15,000 at the cabinet milestone, earned still sits at $25,000. The extra $10,000 earned and not yet billed is a gap on the Balance Sheet, not extra cash.

If estimated cost later rises to $50,000 while cost in stays $20,000, the percent falls to 40 percent. Earned to date would then be $20,000, and the books would adjust.

Common mix-ups

This percent is not the same thing as a progress bill. A progress bill is what you send at a milestone; this page is how much of the job you have earned.

This percent is not cash in the till. Fifty percent earned can sit uncollected while cabinets are already on site.

This percent is not always cost incurred divided by the contract price. The denominator is total estimated cost, not the $50,000 selling price.

Related terms

• Progress Billing: Invoicing a customer in stages as work is completed.
• Work In Progress Schedule: The job-by-job schedule comparing cost incurred, revenue earned, and amounts billed.
• Over Billings: Amounts billed on a job beyond the revenue earned so far.
• Under Billings: Revenue earned on a job that has not yet been billed.
• Revenue Recognition: The rules for deciding when earned revenue may be recorded.
• Job Costing: Tracking revenue and cost for each individual job, project, or order.
• Unbilled Receivables: Revenue earned but not yet invoiced to the customer.
• Contract: The binding agreement that sets what will be delivered and what will be paid.