Percentage ofcompletion
You book revenue by the cost you have burned.
Long construction jobs recognize revenue over time, as the work is done, and the standard way to measure how much is done is cost-to-cost: the cost you have incurred over the cost you expect to incur. It is simple, and it hides a trap. The denominator is a forecast, so the revenue you book is only ever as honest as the estimate behind it.
Revenue, recognized over time
A long-term contract does not wait until the ribbon-cutting to book its revenue. Under ASC 606 and IFRS 15, a job that transfers control to the customer over time recognizes revenue over time, in step with progress. Construction measures that progress most often with a cost-to-cost input method: the share of the total expected cost that has already been spent.
So percent complete is a ratio, cost incurred over cost forecast, and earned revenue is that ratio applied to the contract value. It is a clean idea. The catch is that the denominator, the forecast of total cost, is a live estimate. Move it, and every figure downstream, the percent complete, the revenue, the profit, moves with it.
How the number is built
Four steps take a job from cost incurred to recognized profit. Every one of them rests on the same cost-to-cost ratio, so a soft forecast at the top flows all the way to the bottom line.
| Step | Formula | This job |
|---|---|---|
| Percent complete | AC ÷ EAC | $18M ÷ $45M = 40% |
| Earned revenue | POC × contract value | 40% × $50M = $20.0M |
| Recognized cost | = cost incurred (AC) | $18.0M |
| Recognized profit | earned revenue − cost | $20.0M − $18.0M = $2.0M |
The trap, in numbers
The job above books $20.0M of revenue and $2.0M of profit at 40 percent complete. But the 40 percent leans entirely on the $45M cost forecast. Suppose the real number, once an emerging overrun is faced, is $47M. Then true percent complete is $18M ÷ $47M, about 38 percent, true earned revenue is $19.1M, and about $0.9M of profit has been recognized before it was earned. Nothing looks wrong today. It looks wrong the quarter the forecast is corrected, when that $0.9M reverses as a profit fade.
From cost ratio to recognized revenue
The top bar is the cost-to-cost ratio, filled to 40 percent of the cost forecast. That same 40 percent carries down to the contract value on the bottom bar and becomes $20M of earned revenue. The red sliver is the difference from the truer 38 percent, the profit recognized ahead of the work.
When cost outruns the work
The denominator is one way cost-to-cost misleads. The other is the assumption underneath it: that spending tracks physical progress one for one. Often it does not. Costs are front-loaded, an overrun burns cost without moving the work forward, or materials sit in the yard uninstalled, which is why ASC 606 says to strip significant uninstalled-materials cost out of the measure, though field cost reports often leave it in.
When cost runs ahead of physical completion, cost-to-cost recognizes revenue faster than the job is truly progressing. Watching the burn rate against the real progress rate, period by period, is how you catch that gap early, before it becomes a number you have to explain. The two lines should track together; when they separate, recognition is getting ahead of reality.
Cost spent to date against work actually completed to date, period by period. While the two rise together, cost-to-cost recognition is honest. When burn pulls ahead of progress, revenue is being recognized faster than the job is really advancing.
Burn Rate vs Progress Rate
PODBurn vs progress
Rates & budget
Four ways it goes wrong
Cost-to-cost percent complete divides by the estimated total cost. Carry a soft, understated EAC and percent complete comes out too high, so you recognize revenue and profit you have not actually earned yet.
Cost-to-cost assumes cost tracks physical progress. Front-loaded costs or an overrun make cost outrun the work, and recognition overstates how complete the job is. ASC 606 requires excluding significant uninstalled-materials cost from the measure for exactly this reason, but reports that fold it back in bring the distortion right back.
Folding pending change orders into the contract value or the forecast before they are signed inflates the basis on both sides, and the recognized revenue evaporates if the change is rejected or cut down.
Over-recognized profit does not disappear quietly. It reverses in the period the forecast is corrected, as a profit fade, and the later it is caught the larger and more visible the swing.
Trued up at close vs current every period
A profit fade is only painful because it is found late. The difference between a year-end surprise and a manageable adjustment is whether percent complete and the forecast behind it are kept current as the cost comes in.
- ·Percent complete is computed by hand each period
- ·The cost forecast behind it is updated on a lag
- ·Recognized revenue is trued up at closeout, not tracked
- ·A profit fade surfaces as a year-end swing
- ·POD reads the cost reports your job already produces
- ·Cost-to-cost percent complete and earned value stay current per project
- ·A softening forecast shows in the basis every period
- ·The fade is visible while there is still room to correct it
POD reads the cost reports your job produces and keeps cost-to-cost percent complete and the forecast current per project, so the basis your recognition rests on is current. It pairs with the estimate at completion, the WIP schedule, and earned value management. They are one job read four ways.
The project controls library
The pillar guide: where revenue recognition sits among cost, forecast, and earned value.
The cost forecast that is the denominator of cost-to-cost percent complete. Get it wrong and recognition is wrong.
The billing side: earned revenue set against what you have actually invoiced, job by job.
Earned value is percent complete times budget. The same ratio, read for performance instead of revenue.
The line-item structure the cost and the percent complete are measured against.
A signed change moves the contract value and the forecast, so it moves what you recognize.
Percentage-of-completion questions
What is the percentage-of-completion method in construction?▾
The percentage-of-completion method recognizes revenue and profit on a long-term contract gradually, as the work is performed, rather than all at once when it finishes. Under ASC 606 in the United States and IFRS 15 internationally, a contract that transfers control to the customer over time is recognized over time, and construction most commonly measures that progress with a cost-to-cost input method: the share of total expected cost that has been incurred to date.
How is percent complete calculated with the cost-to-cost method?▾
Cost-to-cost percent complete is actual cost incurred to date divided by the estimated total cost at completion. If a job has incurred $18M of an estimated $45M total, it is 40 percent complete. The figure is only as reliable as the cost forecast in the denominator, which is a live estimate, not a fixed number, so it moves as the forecast is revised.
How is revenue recognized under the percentage-of-completion method?▾
Earned revenue to date is the percent complete multiplied by the total contract value. At 40 percent complete on a $50M contract, $20M of revenue is recognized. Recognized cost is the cost actually incurred, and recognized profit is the difference. Because it accrues over time, the revenue on the books can differ from the amount actually billed, which is exactly the over- and under-billing a WIP schedule reconciles.
What is the difference between percentage-of-completion and completed-contract?▾
Percentage-of-completion recognizes revenue and profit gradually as the work proceeds; completed-contract recognizes nothing until the job is finished and then books it all at once. Over-time recognition gives a truer period-by-period picture and is required under current standards for contracts that transfer control over time. Completed-contract is now limited to narrow cases such as very short jobs or genuine uncertainty about the outcome.
What is profit fade in construction?▾
Profit fade is the erosion of a job’s expected profit as it progresses, typically because the cost forecast was too optimistic early on. Under cost-to-cost recognition, an understated forecast overstates percent complete, so profit is recognized ahead of being earned; when the forecast is finally corrected upward, the previously recognized profit reverses. Caught late, it shows up as a sharp, visible swing rather than a gradual adjustment.
How does POD help with percentage-of-completion and revenue recognition?▾
POD reads the cost reports your job already produces and keeps cost-to-cost percent complete, earned value, and the cost forecast current per project, so the basis your revenue recognition rests on is current rather than reconstructed each period. Because a softening forecast shows up in the percent-complete figure immediately, a profit fade is visible while there is still room to act on it, not only at year-end close.
POD keeps the recognition basis current
Begin with the free budget tracker, then let POD read the cost reports already moving through your jobs, so percent complete and the forecast behind your recognized revenue stay current every period.