{"id":13969,"date":"2019-07-02T11:26:54","date_gmt":"2019-07-02T15:26:54","guid":{"rendered":"https:\/\/foundationsoft.com\/?p=13969"},"modified":"2025-05-15T15:07:25","modified_gmt":"2025-05-15T19:07:25","slug":"completed-contract-method","status":"publish","type":"post","link":"https:\/\/www.foundationsoft.com\/learn\/completed-contract-method\/","title":{"rendered":"Completed Contract Method and ASC 606"},"content":{"rendered":"<p>Construction spending during March 2025 was estimated at a seasonally adjusted annual rate of <a href=\"https:\/\/www.census.gov\/construction\/c30\/current\/index.html\">$2,196.1 billion<\/a>. That is a lot of revenue and documents for contractors to sift through to report income.<\/p>\n<p>When it comes to <a href=\"https:\/\/www.foundationsoft.com\/learn\/cash-flow-management-mistakes\/\">reporting revenue<\/a> from their projects, contractors have typically had a few options:<\/p>\n<ul class=\"PlaygroundEditorTheme__ul\">\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"1\">When they\u2019re paid (cash method)<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"2\">When they bill (accrual method)<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"3\">When they\u2019re done (completed contract method)<\/li>\n<\/ul>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">The completed contract method may seem like one of the simpler methods available, but it has its own pros and cons, as well as new wrinkles through the updated revenue recognition standards called \u201cASC 606.\u201d<\/p>\n<a target=\"_blank\" href=\"\/job-costing-ultimate-guide\/\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/03\/FSL-blog-post-ad-ultimate-guide.png\" alt=\"UG to Job Costing\" title=\"UG to Job Costing\"><\/a>\n<h1 class=\"PlaygroundEditorTheme__h1\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"Key_Takeaways_on_the_Completed_Contract_Method_of_Accounting\"><\/span>Key Takeaways on the Completed Contract Method of Accounting<span class=\"ez-toc-section-end\"><\/span><\/h1>\n<ul class=\"PlaygroundEditorTheme__ul\">\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"1\">The completed contract method of accounting is one of the <strong>fundamental accounting methods used by construction companies<\/strong> to defer revenue and expense recognition until a construction project is fully completed, creating distinct impacts on financial statements.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"2\">Long-term contracts benefit from this accounting approach when project outcomes are uncertain, <strong>helping construction businesses maintain accurate financial health<\/strong> reporting by avoiding premature revenue recognition.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"3\">Unlike accrual and cash basis methods, the<strong> completed contract method affects cash flow management<\/strong> by creating a significant timing difference between when advance payments are received and when they appear on the income statement.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"4\">Construction accounting methods like the completed contract approach <strong>must now align with ASC 606 revenue recognition standards<\/strong>, which focus on transfer of control rather than just contract period completion.<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"5\">Financial performance reporting becomes more volatile with the completed contract method of accounting, as both <strong>revenue and expenses from long-term projects<\/strong> hit the books at a single point in time rather than gradually.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"What_Is_the_Completed_Contract_Method\"><\/span>What Is the Completed Contract Method?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>The completed contract method of accounting is a rule for recording both income and expenses from a project only once the entire project is complete<\/strong>. This contrasts with the percentage-of-completion method (PCM), which recognizes a portion of revenue <em>as <\/em>the contractor completes the contract.<\/p>\n<p>Of course, that doesn\u2019t mean the contractor who uses the completed contract method doesn\u2019t get paid. They\u2019ll continue to bill and receive payment, much like they would under a different revenue recognition method.<\/p>\n<p>The difference is that, until the contract is complete, they\u2019ll keep those amounts on their <em>balance sheet<\/em> rather than on their <em>income statement<\/em>.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Example_of_the_Completed_Contract_Method\"><\/span>Example of the Completed Contract Method<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>For example, let\u2019s say Build-It Construction Co. invoices the owner for work completed to date on a $12,000,000 contract. They\u2019ll debit their A\/R account as normal. However, instead of crediting an income account, they\u2019ll credit a liability account they might call \u201cProgress Billings.\u201d<\/p>\n<table class=\"style-2\" style=\"height: 93px;\" width=\"300\">\n<tbody>\n<tr>\n<th width=\"50%\">Account<\/th>\n<th>Debit<\/th>\n<th>Credit<\/th>\n<\/tr>\n<tr>\n<td>Accounts Receivable<\/td>\n<td>$100,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Progress Billings<\/td>\n<td><\/td>\n<td>$100,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"clear\"><\/div>\n<div class=\"gdlr-space\" style=\"margin-top: 20px;\"><\/div>\n<p>Similarly, their balance sheet holds the costs they incur in an asset account. Companies may call this \u201cConstruction in Process (CIP),\u201d \u201cWork in Progress (WIP)\u201d or something similar.<\/p>\n<table class=\"style-2\" style=\"height: 93px;\" width=\"300\">\n<tbody>\n<tr>\n<th width=\"50%\">Account<\/th>\n<th>Debit<\/th>\n<th>Credit<\/th>\n<\/tr>\n<tr>\n<td>Construction in Process<\/td>\n<td>$50,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Accounts Payable<\/td>\n<td><\/td>\n<td>$50,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"clear\"><\/div>\n<div class=\"gdlr-space\" style=\"margin-top: 20px;\"><\/div>\n<p>Construction in Process and Progress Billings will continue to accrue until the project wraps up. Once Build-It Construction completes the contract, they may finally move these onto the income statement. To clear the full contract amount from Progress Billings, they\u2019ll perform a debit, then credit revenue. To recognize the costs of the contract, they\u2019ll credit Construction in Progress and debit their expenses.<\/p>\n<table class=\"style-2\" style=\"height: 93px;\" width=\"300\">\n<tbody>\n<tr>\n<th width=\"50%\">Account<\/th>\n<th>Debit<\/th>\n<th>Credit<\/th>\n<\/tr>\n<tr>\n<td>Progress Billings<\/td>\n<td>$12,000,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Commercial Revenue<\/td>\n<td><\/td>\n<td>$12,000,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<table class=\"style-2\" style=\"height: 93px;\" width=\"300\">\n<tbody>\n<tr>\n<th width=\"50%\">Account<\/th>\n<th>Debit<\/th>\n<th>Credit<\/th>\n<\/tr>\n<tr>\n<td>Cost of Construction<\/td>\n<td>$8,000,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Construction in Process<\/td>\n<td><\/td>\n<td>$8,000,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"clear\"><\/div>\n<div class=\"gdlr-space\" style=\"margin-top: 20px;\"><\/div>\n<h3><span class=\"ez-toc-section\" id=\"When_to_Use_the_Completed_Contract_Method\"><\/span>When to Use the Completed Contract Method<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><strong>The completed contract method has certain advantages<\/strong> for some contractors.<\/p>\n<p>For one, it allows contractors to defer income for tax purposes. If a project won\u2019t be completed until the following year, the company won\u2019t have to pay tax on that revenue <em>this<\/em> year. Additionally, the <strong>completed contract method is designed to prevent contractors from accidentally recording \u201cphantom revenue\u201d<\/strong> on more unpredictable projects \u2014 that is, earned income they <em>thought <\/em>they would get but may not end up collecting.<\/p>\n<p>Even with these advantages, it\u2019s not always the right method. Because income and expenses hit all at once, <strong>income statements become less useful in the short term<\/strong> and can show major, sudden swings. Additionally, the IRS has several restrictions on when a contractor can use it. This includes a cap on the company\u2019s average annual revenue. Completed-contract-method projects also must be completed under a specified timeframe.<\/p>\n<p>Generally, the completed contract method would be used for the following reasons:<\/p>\n<ol>\n<li><strong>It won\u2019t be possible to get reliable percent-complete estimates through the project.<\/strong><\/li>\n<li><strong>There\u2019s a reasonable chance the contract won\u2019t be completed or collected.<\/strong><\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"3\"><strong>The contract is a short-term project and it wouldn&#8217;t be feasible to split it up into multiple billings.<\/strong><\/li>\n<\/ol>\n<h2><span class=\"ez-toc-section\" id=\"ASC_606_and_Point-in-Time_Transfer\"><\/span>ASC 606 and Point-in-Time Transfer<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The revenue recognition standards that ASC 606 introduced changed the equation slightly for contractors reporting under U.S. GAAP. This is because instead of looking at contract completion, ASC 606 looks at the completion of <em>performance obligations<\/em>. And a single contract may include one or multiple performance obligations.<\/p>\n<p>Overall, revenue is recognized for performance obligations based on when \u201ctransfer of control\u201d occurs. This is essentially when the work becomes the customer\u2019s to own and have use of it. And that may take place either <em>over time <\/em>(think: PCM) or at a single <em>point-in-time <\/em>at the end (think: contract completed). In either case, transfer of control will usually be determined by the contract language \u2014 <em>not <\/em>by how the contractor wants to recognize revenue. Transfer of control, in turn, will be what dictates how the contractor is to recognize revenue.<\/p>\n<p>A contractor recognizes revenue for a performance obligation at a single point-in-time when any of the following conditions are met:<\/p>\n<ul class=\"checked\">\n<li>The customer doesn\u2019t receive or consume benefits from the work until the very end.<\/li>\n<li>The contractor creates or enhances an asset that\u2019s under their own control.<\/li>\n<li>If the contract were to fall through, the contractor would still be able to make another use of the asset <em>and <\/em>wouldn\u2019t yet have the enforceable right to payment.<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Example_of_Point-in-Time_Transfer\"><\/span>Example of Point-in-Time Transfer<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Imagine Build-It Construction is developing a property on land they own and that they&#8217;ve contracted to sell together to Jones Realty, Inc. Build-It has all of:<\/p>\n<ul>\n<li>Physical possession<\/li>\n<li>Legal title<\/li>\n<li>And use and benefit<\/li>\n<\/ul>\n<p>Therefore, during the construction progress, Jones Realty doesn\u2019t gain anything from the work done. Under the contract, they pay Build-It periodically for progress completed, but there\u2019s no transfer of control yet. Accordingly, as with the completed contract method, Build-It holds the value of their billings on their balance sheet before they can recognize it on their income statement.<\/p>\n<p>Now, suppose Jones Realty becomes insolvent and breaches the contract. There\u2019s no more Jones Realty to take control of the performance obligation \u2014 or to pay them!<\/p>\n<p>Avoiding &#8220;phantom revenue&#8221; from this situation is one reason <strong>why it\u2019s good that they <em>don\u2019t <\/em>record their collections as income right away<\/strong>. In this case, however, Build-It should be able to finish the property and turn it over to another buyer.<\/p>\n<p>This demonstrates another reason why <em>point-in-time<\/em> recognition may be appropriate for them to use. Once they do, their costs and income will shift from the balance sheet to their income statement.<\/p>\n<h2 class=\"PlaygroundEditorTheme__h2\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"Making_the_Completed_Contract_Method_of_Accounting_Work_for_Your_Company\"><\/span>Making the Completed Contract Method of Accounting Work for Your Company<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>While <strong>guidance for revenue recognition may have changed in recent years<\/strong>, contractors will find much from the completed contract method alive and well. If the gist is to hold off revenue from the income statement until it&#8217;s assured, ASC 606 point-in-time recognition uses a similar procedure.<\/p>\n<p>Where the completed contract method looks at contracts, however, ASC 606 looks at performance obligations. Additionally,<strong>\u00a0contractors who wish to take advantage of tax deferral benefits from point-in-time transfers<\/strong> may need to make sure that their contracts provide the appropriate conditions for that method.<\/p>\n<a target=\"_blank\" href=\"\/learn\/#schedule-a-live-demo\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/03\/FSL-blog-post-ad-see-how.png\" alt=\"Get a Demo\" title=\"Get a Demo\"><\/a>\n<p>Finally, when assessing and choosing revenue recognition methods, contractors should <strong>consult with their construction-specific CPA<\/strong>. Make sure you&#8217;re getting all of the assistance you need to make sure your accounting procedures are appropriate for both tax and reporting purposes, as well as being helpful in giving you a full and accurate picture of the health of your construction business.<\/p>\n<div id=\"for-more-box\">\n<p><a class=\"gdlr-button medium\" href=\"\/learn\/percentage-of-completion-method\/\" target=\"_self\"  style=\"color:#ffffff; background-color:#000000; border-color:#999999; \"  >Up Next: The Future of the Percentage-of-Completion Method \u00bb<\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Construction spending during March 2025 was estimated at a seasonally adjusted annual rate of $2,196.1 billion. That is a lot of revenue and documents for contractors to sift through to report income. When it comes to reporting revenue from their projects, contractors have typically had a few options: When they\u2019re paid (cash method) When they bill (accrual method) When they\u2019re &#8230; <\/p>\n<div><a href=\"https:\/\/www.foundationsoft.com\/learn\/completed-contract-method\/\" class=\"more-link\">Read More<\/a><\/div>\n","protected":false},"author":17,"featured_media":8449,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_searchwp_excluded":"","inline_featured_image":false,"footnotes":""},"categories":[9,16],"tags":[11],"class_list":["post-13969","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","category-reporting-bookkeeping","tag-construction-reporting"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Completed Contract Method and ASC 606 - Foundation Software<\/title>\n<meta name=\"description\" content=\"The completed contract method is a rule for recording both income and expenses from a project only once the entire project is complete.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.foundationsoft.com\/learn\/completed-contract-method\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Completed Contract Method and ASC 606\" \/>\n<meta property=\"og:description\" content=\"While \u201ccompleted contract method&quot; may seem like one of the simpler methods available, it has its own pros and cons \u2014 as well as new wrinkles through the updated revenue recognition standards called \u201cASC 606.\u201d\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.foundationsoft.com\/learn\/completed-contract-method\/\" \/>\n<meta property=\"og:site_name\" content=\"Foundation Software\" \/>\n<meta property=\"article:published_time\" content=\"2019-07-02T15:26:54+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-05-15T19:07:25+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.foundationsoft.com\/wp-content\/uploads\/2017\/09\/2017-09_FOUNDATION-ArticleArtwork-NeedCashFlowReporting.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"750\" \/>\n\t<meta property=\"og:image:height\" content=\"330\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Frank Osborn\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"The Completed Contract Method and ASC 606\" \/>\n<meta name=\"twitter:description\" content=\"The completed contract method is a rule for recording both income and expenses from a project only once the entire project is complete.\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Frank Osborn\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.foundationsoft.com\/learn\/completed-contract-method\/\",\"url\":\"https:\/\/www.foundationsoft.com\/learn\/completed-contract-method\/\",\"name\":\"The Completed Contract Method and ASC 606 - 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