For example, a contractor may be hired to build a 200-home development. The units-of-delivery method can be used when a project depends on deliveries of specific units. For example, if a contractor estimates a project will take 25,000 labor hours, and, to-date, labor hours are at 16,000, you can divide 16,000 by 25,000 and multiply by 100 to determine the project is at 64% completion. The calculation to determine the percentage of completion is the same: divide current effort by total effort and multiply by 100. The units used to calculate effort expended may be labor hours, machine hours or amount of materials. The efforts-expended method compares the total estimated effort with the effort expended to date. For instance, if a project's total costs are expected to be $5 million, and the current costs incurred are $2 million, you can divide $2 million by $5 million and multiply by 100. To determine the percentage of completion, divide current costs by total costs and multiply by 100. The cost-to-cost method compares the total expected costs of a project to the costs incurred to date. The percentage of completion is determined in one of three ways: Cost-to-cost method
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Related: How To Become a Successful General Contractor Ways to calculate percentage of completion Contractors can reasonably assume clients will make payments for these jobs and make appropriate estimates of project completion percentages using several methods. The construction and contracting industry often uses the percentage of completion method for lengthy projects, such as bridges, multi-building facilities and other large undertakings. Reasonable estimates for project costs and percent of completion is possible Instead of accounting for all revenue and costs at the end of a project, the percentage of completion method determines revenues and costs based on how far along a project is at a specified time.įor the percentage of completion method to be accurate, a project must meet the following criteria:
The percentage of completion method is a way for companies to recognize revenue on a period by period basis during long-term contracts. Related: 10 Types of Accounting and 5 Important Accountant Careers What is the percentage of completion method? In this article, we discuss what the percentage of completion method is, how to calculate it, why it is important and examples of how to use the percentage completion method. Accountants can implement methods that meet company needs and align with project budgets and timelines.
Different types of companies are better suited for precise figures, while others depend on best estimates. Companies rely on multiple methods of monitoring and reporting financial gains and losses.
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