Key Takeaways
- Percentage-of-completion (POC) accounting recognizes revenue and costs as work is performed, not just when a project wraps up. This gives contractors a truer picture of financial health mid-project.
- Choosing the right method (POC vs. completed contract) affects everything from tax timing to how a project looks to a bonding agent or lender.
- A well-maintained work-in-progress (WIP) schedule is the backbone of accurate POC accounting and the most common place contractors run into trouble.
- Getting this right is more than a compliance exercise; it’s also a valuable tool for spotting margin erosion before it becomes a real problem.
Ask five contractors how a job is going, and you’ll often get five different answers depending on what they’re looking at: cash in the bank, invoices sent, or the feeling in their gut. None of those tell the full story. That’s where percentage-of-completion accounting earns its keep.
What Percentage-of-Completion Actually Means
At its core, POC accounting matches revenue and costs to the actual progress of a job, rather than waiting until the project is finished to record anything. If a contract is 40% complete based on costs incurred, the contractor recognizes roughly 40% of the expected revenue and profit on the income statement, even if final billing hasn’t caught up yet.
For most long-term contracts, this isn’t optional. Generally accepted accounting principles (GAAP) and IRS rules for long-term contracts often require POC treatment once certain revenue thresholds are met. But even for contractors who technically qualify for the completed contract method, POC accounting usually gives a more honest, useful view of where things stand.
Why It Matters Beyond the Balance Sheet
Percentage of Completion matters especially from anyone outside the company looking in. Bonding agents and bankers rely on accurate, current financials to gauge whether a contractor can take on new work. A WIP schedule built on solid POC data tells that story clearly. One built on guesswork raises questions at exactly the moment a contractor needs confidence, not scrutiny.
The WIP Schedule Is Where This Gets Real
The work-in-progress schedule is the engine behind POC accounting, and it’s also where most of the trouble starts. A WIP schedule tracks, for every active job: total contract value, estimated costs to complete, costs incurred to date, billings to date, and the resulting over- or under-billing position.
The estimates are the hard part. Percentage-of-completion is only as accurate as the cost-to-complete estimates behind it, and those estimates should be revisited regularly, not set once at the start of a job and forgotten. A subcontractor’s price increase, a permitting delay, or a scope change can all shift the math. Contractors who update their WIP schedules monthly tend to catch margin erosion while there’s still time to do something about it.
Where This Tends to Go Sideways
A few patterns show up again and again:
- Overly optimistic cost estimates. It’s natural to assume a job will come in on budget. POC accounting punishes that optimism by overstating profit early, then forcing a correction later.
- Inconsistent job costing. If labor, materials, and overhead aren’t tracked consistently across jobs, the WIP schedule is only as reliable as the weakest link.
- Treating the WIP schedule as a year-end task. By the time it’s reviewed once a year, the information is stale and the chance to course-correct mid-project is gone.
None of these are complicated problems to prevent. They just require a system, and a habit of checking it.
Getting Started (Or Getting Better)
Contractors don’t need to overhaul their whole accounting system to improve here. The starting point is usually a straightforward one: build (or clean up) a WIP schedule, set a monthly cadence for updating it, and involve project managers in refining cost-to-complete estimates, since they often see problems on the ground before the numbers do.
Getting the mechanics right pays off well beyond the financial statement or tax return. It’s one of the clearest ways for a contractor to know, in real time, whether a job is actually making money.
A Rea advisor can help you build a WIP process that holds up under scrutiny and gives you a clearer read on every job in progress. Reach out to our team at reaadvisory.com/contact to talk through what that could look like for your business.
About the Author
Clay Matthews, Supervisor, works with construction clients across Ohio, helping contractors bring clarity to job costing, WIP reporting, and day-to-day financial decisions.
