Percentage of completion method Construction

Percentage of completion method Construction – The percentage of completion method is used when the contract involves the completion of more than one act. Under the percentage of completion method, revenue is recognized proportionately with “the extent of work accomplished” by the contractor, by reference to the performance of each act (performance obligation). Under IFRS 15 Revenue from contracts with customers, the percentage of completion method classifies as revenue recognition over time.

Many contractors have adopted what they believe to be the percentage of completion method using billings or periodic payment certificates as a basis for recognizing revenue. This is only appropriate under IFRS if the amount billed is representative of the extent of work accomplished.

For the reasons stated above, the amount billed can be greater than the work actually completed. This is a practical bias as it can be up to two months or more before the contractor is paid and under billing, from a cash flow perspective, can be hazardous to a contractor’s health.

Using billings as a base also distorts revenue recognition, causing more revenue to be earned at the front end and a mismatch with costs incurred. This has implications for tax purposes, as income tax may be paid prematurely. Contractors should use deferred or accrued revenue to report incomplete jobs at the expected final profit percentage.

In the construction industry, the most reliable measurement of the extent of work accomplished tends to be cost-based, in particular when materials, labor and equipment costs/rentals are inputs to the ‘production’ process (The input method – Measuring progress to completion). Percentage of completion method Construction

Other bases that would be considered appropriate are labour hours or machine hours, where material costs in a contract are negligible (i.e. site work for road construction).

The percentage of completion is then derived from a simple formula, ‘actual costs incurred (or hours spent) to date’ divided by ‘total costs (or hours) to complete the contract’. The total cost to complete a project is equal to actual costs incurred to date for a project plus estimated costs to complete the project. Percentage of completion method Construction

Since the initial costing of a contract in the bidding phase is based on estimated total costs, actual total costs to complete a contract will change as the project progresses. As a result, it is necessary for management to make its best estimate of costs to complete a project to determine the expected total cost of the project. So while the formula is simple, there is effort required on the part of management to estimate costs to complete contracts that are in process. Percentage of completion method Construction

Another way to measure progress towards completion of a construction project is the direct measurement of the value of goods or services transferred to date in comparison with the remaining goods or services to be provided under the contract (The output method – Measuring progress to completion).

Percentage of completion method Construction

Percentage of completion method Construction

Many contractors have adopted what they believe to be the percentage of completion method using billings or periodic payment certificates as a basis for recognizing revenue. This is only appropriate under IFRS if the amount billed is representative of the extent of work accomplished.

For the reasons stated above, the amount billed can be greater than the work actually completed. This is a practical bias as it can be up to two months or more before the contractor is paid and under billing, from a cash flow perspective, can be hazardous to a contractor’s health. Using billings as a base also distorts revenue recognition, causing more revenue to be earned at the front end and a mismatch with costs incurred. This has implications for tax purposes, as income tax may be paid prematurely. Contractors should use deferred or accrued revenue to report incomplete jobs at the expected final profit percentage. 

Percentage of completion method Construction Percentage of completion method Construction Percentage of completion method Construction

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