What Is the Percentage of Completion Method? (With Examples)

By Indeed Editorial Team

Published June 10, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Selecting an effective method of reporting revenue and expenses can help ensure transparency and accurate accounting. Among the available options, calculating a project's completion percentage is a common method. By learning more about this accounting method, you can decide whether it aligns with a project's budget and timeline and consider using it to recognize cash flow. In this article, we define the percentage of completion method, explain why it's important, differentiate it from the completed contract method, discuss calculating it, and share several calculation examples.

What is the percentage of completion method?

The percentage of completion method (PCM) involves reporting the revenue and expenses of long-term contracts as a percentage of the work completed within a project timeframe. This accounting method is popular in construction and engineering projects, such as constructing a bridge, because it aligns the budget with the progress of the project. Adopting it may also be helpful if you're a contractor working on energy facilities, software development projects, or public sector infrastructure. You can generally use this method under the following conditions:

  • You can estimate a project's revenue and expenses.

  • All parties involved can complete their project duties and responsibilities within the allocated time.

  • You have a client's payment assurance.

The PCM typically involves comparing a project's cash flow with its total estimated costs to determine the total tax obligation. For example, suppose a project is 20% complete in the first year and 35% complete in the second year. This typically implies a 15% increase in revenue that it can recognize and file taxes for in the second year.

Related: How to Calculate Growth Percentage (With Examples)

Why is this method important?

The PCM can help businesses measure their actual revenue and incurred costs as they complete milestones. Many organizations may also use it to divide their tax obligations over multiple periods instead of accumulating the tax burden at the project's end. For example, suppose a company receives $10 million in revenue for completing 50% of a two-year project after the first year. After deductions from the $10 million, it can legally file taxes instead of waiting until it receives the total revenue.

Related: What Is Revenue? (With Definition, Types, and Examples)

Percentage of completion vs. completed contract methods

The completed contract method (CCM) is another accounting option outlining when a business can report revenues and expenses. It involves recording the cash flow of a long-term contract upon project completion. Businesses that use this method typically define the expected completion date, which is often months or years from a project start date. CCM doesn't involve estimating project costs in advance, but requires paying all tax obligations at once.

Methods of calculating the percentage of completion

You can determine the percentage of completion in the following ways:

Cost-to-cost method

This method involves calculating the percentage of project completion based on the total estimated project cost. Here's the formula for this calculation:

Percentage completed = (Costs incurred to date / Estimated total cost) x 100

Example: A business has a contract to build an estate for $20 million. It expects to complete the project in three years and projects $15 million as the total cost. In the first year, the business spends $5 million on project resources. Using the cost-to-cost method, it calculates the percentage completion as $5,000,000 / $15,000,000, which equals 0.33. Multiplying this figure by 100 gives 33%.

Efforts-expended method

This method involves calculating a project's completion rate based on the total effort expected to complete it. You can measure effort as direct labour hours, machine hours, or material quantities. Here's the formula you can use for this calculation:

Percentage completed = (Effort expended to date / Total required effort) x 100

Example: A business estimates that a project requires 25,000 machine hours. Tracking the operational periods, managers notice that operators only used the machine for 16,000 machine hours. They calculate the percentage completion using the efforts-expended method as 16,000 / 25,000, which gives 0.64. Multiplying this figure by 100 equals 64%.

Units-of-delivery method

This method involves calculating project completion as a percentage of the total project units delivered to a client, following a contract's terms. Here's a formula you can use for your calculation:

Percentage completed = (Units delivered to date / Total agreed units) x 100

Example: A construction agency earns a contract to build 200 homes in a community and completes 80 homes in three years. Using the units-of-delivery method, the agency calculates project completion as 80 / 200, which equals 0.4. Multiplying this figure by 100 results in 40%.

How to use the percentage of completion method

Here are the steps to take if you want to use this accounting method:

1. Measure the project completion

You can use the cost-to-cost, units-of-delivery, or efforts-expended methods to find the percentage of project completion. Each method typically produces different results. For example, the ratio of cumulative to total costs may differ from the ratio of cumulative to total units delivered.

2. Find the total revenue recognized to date

Recognized revenue refers to the monetary amount received by selling a product or delivering a service. You can use the percentage of project completion to determine this figure. Here's the formula for this calculation:

Total revenue recognized to date = Percentage completed x Total estimated contract revenue

3. Determine the revenue and cost for the current period

You can perform this calculation by subtracting any estimated revenue from the accumulated amount. To repeat previous calculations for a project's costs, you can find the total expenses to date using the formula:

Total cost to date = Percentage completed x Total estimated costs

Tips for using the percentage of project completion method

Here are helpful practices for using this accounting method in business settings:

  • Be honest: Reporting income and expenses during accurate accounting periods can help it follow all accounting standards. Stating figures that reflect a business's reality can also ensure transparency.

  • Use a calculator: Because calculations may involve several numbers, consider using a calculator or spreadsheet package.

  • Write each term's value: Writing each term can help you perform accurate calculations. For example, it may be easier to differentiate the total revenue recognized to date from the total estimated revenue if you write and define both terms.

  • Update the financial statement: Recognizing income and expenses using the PCM generally requires you to update a business's income statement. An income statement reports an organization's financial performance over a specific accounting period.

Related: What Is an Income Statement? (With Definition and Template)

Example calculations using the percentage of project completion method

Here are examples that can help learn more about using the PCM:

Example for a construction firm

This example describes how a construction firm might use the percentage of project completion method for accounting:

Baker Tree Construction secures a three-year contract to build a health care complex. After extensive market research, its analysts expect the firm to spend $10 million on the project. They also expect to receive $14 million in revenue. After the first year, Baker Tree Construction incurs $2 million as project expenses and $6 million after the second year. It calculates the percentage of completion as ($2 million / $10 million) x 100 using the cost-to-cost approach. This equals 20% project completion after the first year.

The analysts repeat their calculation for the second year using the expression, ($6 million / $10 million) x 100. This equals 60% project completion after the second year. Next, they calculate the total revenue recognized for the first year as 0.2 x $14 million, which equals $2.8 million. Similarly, the recognized revenue after the second year is 0.6 x $14 million, which equals $8.4 million. The firm's analysts calculate the revenue for only the second year by subtracting the first year's revenue from the revenue to date. This gives $8.4 million - $2.8 million, which equals $5.6 million.

Example for a software consulting company

This example describes how a software consultancy might use the percentage of project completion method for accounting:

Red Tick Consulting secures a contract to develop an enterprise system for a franchise. The company's analysts expect the project to take approximately 600,000 work hours and cost $25 million. The total estimated revenue for building the software system is $45 million. In the first year, the company's software developers worked 300,000 hours and 600,000 in the second year.

Red Tick Consulting calculates the percentage completion for the first year as (300,000 / 600,000) x 100, which equals 50%. Using this figure, the company determines its recognized revenue as 0.5 x $25 million, which equals $12.5 million. Because the hours worked in the second year equals the estimated work hours required, the company completes the software development project in the second year.

Explore more articles