What is the difference between completed contract and percentage of completion accounting?
Completed contract accounting waits until a project is finished to recognize any revenue or profit. You might spend six months on a job, bill progress payments throughout, and carry significant costs. None of it shows as income until the project is complete. Then the entire profit or loss hits your books in that final period.
Percentage of completion works as the name suggests. As you finish portions of a project, you recognize that portion of revenue and costs. If you’ve incurred 60% of expected costs on a job, you recognize 60% of expected revenue. Your financial statements show work in progress rather than nothing until completion.
The tax timing difference is significant. A contractor using completed contract on a project that starts in November and finishes in March can defer all income to the following tax year. The same project under percentage of completion would split income between both years based on work performed in each period.
Not every contractor gets to choose. The IRS requires percentage of completion for larger construction businesses. The small contractor exception allows completed contract for businesses averaging $29 million or less in gross receipts over the prior three years. Below that threshold, you typically have flexibility.
Each method has practical tradeoffs beyond taxes. Completed contract is simpler to manage in your books since you’re not calculating completion percentages or estimating total costs throughout the project. But it creates lumpy financial statements where one quarter might show minimal revenue and the next shows several completed projects hitting at once.
Banks and bonding companies often prefer percentage of completion because it shows a more accurate picture of ongoing work. If you’re pursuing larger contracts that require bonding, your financial statements need to reflect work in progress. Showing nothing until completion understates the value of contracts you’re actively performing.
The calculation for percentage of completion requires accurate job costing. You need to track costs by project and estimate total expected costs reliably. If your cost tracking is loose, the revenue recognition becomes unreliable. Garbage cost data produces garbage financial statements.
Switching between methods isn’t something you do casually. The IRS treats it as a change in accounting method requiring formal approval. If you’ve been using one method and want to change, talk to a Boise area enrolled agent who understands construction accounting before making that decision.
For most smaller contractors, completed contract offers simplicity and potential tax deferral. For those needing strong financials for bonding or bank relationships, percentage of completion provides a more accurate ongoing picture. The right choice depends on your business size, bonding needs, and how well you track job costs.
The Treasure Valley's Tax and Accounting Team
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