Percentage of completion method: Guide for contractors

On a long-running job, every delay in revenue recognition puts WIPs, tax positions, and bonding pictures out of sync with what’s actually happening on-site. But long-term contracts can span multiple accounting periods and accumulate hundreds, if not thousands, of line items, making this a complex process.

That’s why many finance teams use the percentage of completion (POC) method. Instead of waiting until the job closes to recognize revenue and expenses, POC recognizes them in stages as the work progresses. For long-duration jobs, this means more accurate income statements, work in progress (WIP) scheduling, and lender evaluations.

This guide explains how to calculate POC and lays out Internal Revenue Service (IRS) expectations and common challenges in project-based accounting.

What is POC in accounting, and why is it important?

In accounting, the POC method is the practice of recognizing revenue and profit in stages throughout a project. It’s the opposite of the completed contract method (CCM), which only calculates and recognizes all relevant transactions after the project ends. 

Here are a few reasons POC is useful: 

• Accurate revenue recognition: Under IRC §460, any contract that doesn’t wrap up in the same tax year it starts is a long-term contract, which means revenue and costs land in multiple accounting periods. POC matches them to the periods where the work actually happened.
• Cleaner work in progress (WIP) reporting: Tracking expenses and income by period aligns with WIP reporting. These documents track the status of ongoing projects alongside profitability. Combining these processes avoids duplicate work and makes it easier to spot discrepancies. 
• Stronger lender and surety credibility: Sureties evaluating your bonding capacity and lenders sizing your line of credit both lean on your WIP, and your WIP is only as good as your POC. Tight POC supports higher bonding limits and better lending terms. 
• Earlier visibility into errors: Recognizing revenue and costs each period forces contractors to reconcile job cost data regularly instead of all at once during job close. Doing so surfaces miscoded labor, missed change orders, and stale estimates while there’s still time to fix them.

Percentage of completion and compliance

Implementing POC can help contractors comply with IRS rules and Generally Accepted Accounting Principles (GAAP). 

For instance, under Internal Revenue Code (IRC) §460, the IRS outlines special rules for long-term contracts. These legal requirements state that companies must determine taxable income through the POC method and describe standards for calculating gross income and compound interest. 

GAAP Accounting Standards Codification (ASC) 606 also describes steps and actions for companies working with contracts and customers. It suggests that long-term contracts use POC to make revenue tracking easier and more traceable. ASC 606 is a legal expectation for public companies, but not private firms. However, banks, lenders, and investors often require private businesses to adopt GAAP policies.

How to calculate the percentage of completion

ASC 606 defines two types of POC: input methods and output methods. Input methods measure revenue by what the contractor puts into the job, like costs incurred or labor hours worked. Output methods instead measure based on how much value the customer receives.

Here’s how to calculate percent complete using each technique.

Input methods

Here are the most common input methods finance teams use to calculate POC. 

Cost-to-cost method

This is the most common percent complete formula in construction contexts. It assumes that the costs a contractor incurs generally matches the progress they’ve made. To calculate it, finance leaders need three numbers: the actual costs incurred to date, the total estimated cost at completion (costs already incurred plus the estimate to complete the remaining work), and the contract value.

Here’s the cost-to-cost formula: 

(Costs incurred to date / Total estimated cost at completion) × Contract value = Revenue earned to date

The first part of the formula (costs incurred to date divided by total estimated cost at completion) gives the “percent complete” figure. Multiplying this by the contract value gives the project’s “revenue earned to date,” which is what finance teams actually record. 

These numbers shift as the project continues. Imagine a $2M contract with a total estimated cost of $1.5M at the start. Say that in period one, the project incurs $600,000 in costs. At this stage, the percent complete is 40% ($600,000/$1.5M), and revenue earned to date under cost-to-cost is $800,000. 

Now say that in period two, the project incurs another $300,000 in costs, bringing the costs to date to $900,000. The team also revises the total estimated cost up to $1.6M after a scope change. Percent complete is now 56.25% ($900,000/$1.6M), and revenue earned to date is $1.125M. 

The accuracy of the final calculation depends on the quality of the input numbers. Late timesheets, miscoded labor, change orders that haven’t been priced yet, and stale cost estimates are the usual culprits behind bad POC numbers. Tighten those inputs before each period close.

Efforts-expended method

In construction, the efforts-expended method focuses more on labor hours than on expenses. The formula is as follows: 

(Hours worked to date / Total estimated hours) × Contract value = Revenue earned to date

This calculation is helpful for intensive work where labor hours are a clearer representation of progress than finances, like electrical, mechanical, or finish trades where material costs are small relative to the labor required. For a finance-based efforts-expended calculation, contractors should replace hours worked with labor cost.

Output methods

Here’s the main output method that finance teams tend to rely on.

Units-of-delivery method

The units-of-delivery method calculates completion by comparing the number of measurable work units that the contractor delivers to the customer against the total number in the contract. Examples include identical housing units in a tract development, linear feet of pipe laid, or tons of asphalt placed.

Here’s the units-of-delivery method formula: 

(Units delivered / Total units in contract) × Contract value = Revenue earned to date

This method isn’t as common in construction since it relies on consistency, and typical projects rarely progress in an even, predictable manner.

POC in construction: Common challenges

While POC streamlines the accounting process, it can also present compliance challenges and potential inconsistencies. Here are some roadblocks to look out for.

Overbilling and underbilling

Because of the complexity of long-term construction projects, overbilling (when a contractor bills more than they’ve earned to date) and underbilling (where they’ve earned more than they’ve billed) are constant risks. 

When POC figures drift, it can cause serious issues. For example, overbilling can make jobs seem more profitable than they really are, and underbilling can tie up capital. Significant overbilling on a job shows up as a “billings in excess of costs” liability on the balance sheet, and sureties read that as a warning sign that the contractor is borrowing against future work. Track over and underbilling by job each period. Contractors should also note that sureties and lenders often look for effective POC and financial tracking when they evaluate bonding capacity.

Change order complications

Change orders are routine, but they need to update the contract value and estimated total cost before the next POC calculation. The common trap: Costs from a change order hit the books before the contract value is updated, which makes the percent complete jump and creates phantom revenue.

Contractors should establish a documented process to immediately update all relevant numbers after a change order. 

Inaccurate or stale job cost 

Dozens of variables can lead to inaccurate numbers: Late timesheets, miscoded labor, and incorrect billing periods distort costs and affect POC calculations. Finance leaders must account for these errors and standardize the input process. Enforce daily timesheet submission, require cost code selection at clock-in, and reconcile job cost reports against payroll each period. 

Inaccurate estimates of total cost

Inaccurate total cost estimates are one of the most common causes of POC mistakes. If total estimated costs aren’t up to date, the cost-to-cost formula could result in excessively low or high numbers. Managers should update ETCs regularly to avoid drift and make decisions that actually reflect financial reality. 

WIP scheduling disruption

WIP reports work off POC calculations, so inaccurate numbers can throw off everything from billing to cash flow forecasts to surety reviews, leading to overbilling or underbilling. 

Finance teams should update the general ledger each period and explain any variances. This will ensure leaders and lenders understand where potential inaccuracies come from and any planned fixes. 

Scattered data

Disconnected systems can exacerbate any potential disruption. Separate payroll, job cost, and accounting tools require finance teams to put in far more work and create more opportunities for error. Every reconciliation between payroll, job cost, and accounting is a chance for numbers to drift. Contractors running separate systems for each typically spend the first week of every month chasing variances instead of closing the period.

Improve financial visibility with Miter.

Reliable POC depends on three inputs landing accurately every period: labor costs coded to the right job and cost code, progress data from the field, and a clean handoff to the ERP.

Miter centralizes POC inputs for increased financial visibility and easier reporting. Miter’s precise job costing software matches every dollar of labor to the right job and cost codes. Miter’s Field Productivity report tracks percent complete two ways at once: by hours (efforts-expended) and by installed quantities (units-of-delivery), with the data logged directly by foremen in the field through daily reports and quantity logs. 

The platform aids ‌accounting by integrating ledger entries and cost codes into construction ERPs like Sage 300 and Acumatica. This means the data behind every calculation flows into the system of record smoothly. Miter simplifies POC in construction by centralizing tracking and feeding inputs directly into contractors’ ERPs.

Frequently asked questions

What are the IRS requirements for percentage of completion?

The IRS requirements for POC fall under IRC §460. The agency states that firms must use the POC method for long-term contracts. It also includes the look-back interest rule, which calculates interest based on actual project costs rather than estimates.

What is an alternative to the percentage of completion method?

The main alternative to POC is the completed contract method, or CCM. This recognizes revenue and expenses at the end of the project instead of throughout. The One Big Beautiful Bill Act changed the regulations surrounding the CCM. Contractors can now use this accounting method if: 

• At least 80% of their estimated costs go toward residential buildings (the definition of which has broadened) 
• Or, they expect to complete work within three years of starting the project, and their annual gross receipts total $31 million or less across the previous three years

Note that these changes only apply to projects that started after July 4, 2025. Any project that started earlier is subject to older rules. 

CCM is simpler day to day, but contractors don’t see profit or loss on a job until it closes. A project that’s been bleeding margin for 18 months looks fine on the books right up until the final reconciliation, and by then, there’s nothing to do about it.