What Is the Percentage of Completion Method?
By BRIX Editorial Team · Updated
The percentage of completion method recognizes revenue and profit on a long-term contract as the work progresses, instead of all at the end. Contractors usually measure progress by dividing costs incurred to date by total estimated costs, then apply that percentage to the contract price. It shows profit in the periods the work is actually done.
Key takeaways
- Percent complete = costs to date ÷ total estimated costs (the cost-to-cost method).
- Revenue earned to date = percent complete × contract price. This period's revenue = earned to date − revenue already recognized.
- Accuracy depends on your estimate to complete. Update total estimated costs every month.
- For taxes, IRC §460 requires percentage of completion on long-term contracts unless an exemption applies, such as residential construction contracts or short contracts of smaller contractors.
- Your WIP report is where percentage of completion meets billing, showing overbillings and underbillings.
How does the percentage of completion method work?
Say an HVAC contractor signs an $800,000 contract to replace rooftop units and ductwork in an office building. The job starts in September and finishes the following May. If the company waited until May to book any revenue, its first year would show $256,000 of costs with no income, and its second year would show a huge profit. Neither is true. Percentage of completion spreads the revenue and profit across both years in proportion to the work done.
Percent complete = Costs incurred to date ÷ Total estimated contract costs
- Costs incurred to date
- materials, labor, subs and equipment charged to the job so far
- Total estimated contract costs
- costs to date + your current estimate of costs to complete
Revenue this period = (Percent complete × Contract price) − Revenue recognized in prior periods
What are the ways to measure percent complete?
| Measure | How it works | Good for | Watch out for |
|---|---|---|---|
| Cost-to-cost | Costs to date ÷ total estimated costs | Most construction contracts; it's the measure IRC §460(b) uses for tax | Big material deliveries before installation inflate percent complete |
| Labor hours | Hours to date ÷ total estimated hours | Labor-heavy work like electrical rough-in or service contracts | Ignores materials and subs |
| Units completed | Units done ÷ total units | Repetitive work: homes in a subdivision, linear feet of pipe, roofing squares | Units may not take equal effort |
| Physical estimate | Engineer's or PM's estimate of work done | Checking the other methods | Subjective; hard to support to a lender or auditor |
Whatever measure you use, apply it consistently. If you buy $90,000 of rooftop units in month one but won't set them until month four, many contractors leave uninstalled materials out of costs to date (or track them separately as stored materials) so the job doesn't look further along than it is.
Percentage of completion vs. completed contract
| Percentage of completion | Completed contract | |
|---|---|---|
| When revenue is recognized | As work progresses | When the contract is finished |
| Profit timing | Spread across the life of the job | All in the year the job closes |
| Financial statements | Smoother results; what lenders and sureties usually expect | Lumpy results; years with big jobs in progress look like losses |
| Tax use | Required for long-term contracts under IRC §460 unless exempt | An option for some exempt contracts; ask your CPA |
| Effort | Needs reliable cost tracking and monthly estimates | Simpler bookkeeping |
When is percentage of completion required for taxes?
Under IRC §460(a), taxable income from any long-term contract (one that isn't finished in the tax year it's entered into) is determined using the percentage of completion method. Section 460(b) measures progress by comparing costs allocated to the contract and incurred before year-end with total estimated contract costs, and it requires "look-back" interest to be computed when the contract is completed, to correct for estimates that turned out wrong.
Section 460(e) exempts construction contracts that are either residential construction contracts, or contracts the contractor expects (when signed) to complete within two years and entered into in a year when the contractor meets the §448(c) gross receipts test. That limit is $32 million in average annual gross receipts for tax years beginning in 2026, per IRS Rev. Proc. 2025-32. A 2025 law (Pub. L. 119-21) broadened the residential exemption, for contracts entered into in tax years beginning after July 4, 2025. See accrual vs. cash accounting for how this fits with your overall method.
How does percentage of completion relate to ASC 606?
For financial statements under U.S. GAAP, revenue follows ASC 606 (Topic 606, Revenue from Contracts with Customers). Its core principle is to recognize revenue to depict the transfer of promised goods or services to customers, in an amount that reflects what the company expects to be entitled to. A performance obligation can be satisfied over time or at a point in time. Most construction contracts transfer control over time as the contractor builds on the customer's property, so the result usually looks like percentage of completion, and contractors commonly measure progress with cost-to-cost. Your CPA decides the right measure for audited or reviewed statements.
Percentage of completion by trade
| Trade | Typical long jobs | Common progress measure |
|---|---|---|
| Commercial HVAC | Rooftop unit replacements, new-construction mechanical | Cost-to-cost; equipment often tracked as stored materials until set |
| Commercial plumbing | New-construction rough-in and trim, repipes | Cost-to-cost or labor hours by phase |
| Electrical | Tenant fit-outs, service upgrades, solar | Labor hours or cost-to-cost |
| General contractor | Remodels, additions, commercial build-outs | Cost-to-cost against the schedule of values |
| Roofing (commercial) | Large flat-roof replacements spanning months | Squares installed or cost-to-cost |
| Residential service trades | Rarely; most jobs finish in days | Not needed for one-day jobs |
Common percentage of completion mistakes
- Stale estimates. Using the bid estimate months into the job overstates profit until the last month, then it all fades at once.
- Front-loaded materials. Counting big deliveries before installation inflates percent complete and profit.
- Confusing billing with earning. What you've billed isn't what you've earned. The difference is overbilling or underbilling on your WIP report.
- Leaving out change orders. Approved change orders change both contract price and estimated cost. Pending ones need a consistent policy.
- Costs not coded to jobs. If labor and materials don't land on the right job, percent complete is fiction. See job costing.
Frequently asked questions
What is the formula for percentage of completion?
With the cost-to-cost method, percent complete equals costs incurred to date divided by total estimated contract costs. Multiply that by the contract price to get revenue earned to date, then subtract revenue recognized in earlier periods to get this period's revenue.
Who has to use the percentage of completion method?
For taxes, IRC §460 requires it on long-term contracts unless an exemption applies. Residential construction contracts are exempt, and so are other construction contracts expected to finish within two years when the contractor meets the gross receipts test ($32 million for 2026). Many contractors also use it on their financial statements because lenders and sureties expect it.
What's the difference between percentage of completion and progress billing?
Percentage of completion is how you recognize revenue in your books. Progress billing is how you invoice the customer. They often move together, but you can bill ahead of or behind the work, which creates overbillings or underbillings.
What happens if my cost estimate changes?
You recalculate percent complete with the new total estimated cost, and the cumulative adjustment hits the current period. That's why profit can fade or rise late in a job. Updating estimates every month keeps surprises small.
Can a small contractor use the completed contract method?
For taxes, contracts exempt under IRC §460(e) aren't required to use percentage of completion, and the completed contract method is one option some use. Which method fits depends on your contracts and overall accounting method, so decide with your CPA.
Does percentage of completion apply to service work?
Rarely. A repair or replacement that starts and finishes in a few days is simply invoiced and recorded when done. Percentage of completion matters on contracts that span months or cross a year-end.
Related
- What Is a WIP Report (Work-in-Progress Schedule)?What a construction WIP report is, every column explained, a four-job worked example with over and under billings, how to read it, and mistakes to avoid.
- What Is Progress Billing?Progress billing explained: milestone, percent-complete and schedule-of-values methods, worked examples, QuickBooks progress invoicing steps and pitfalls.
- Accrual vs. Cash Accounting: What's the Difference for Contractors?Cash vs. accrual accounting for contractors: how each records a job, IRS rules, the 2026 gross receipts test, long-term contracts and which to use.
- What Is Job Costing?Job costing tracks what each job really cost vs. the estimate. What to track, a sample job cost report with variances, and a simple system for small crews.
- AIA Billing Explained: How to Fill Out a G702 and G703AIA billing explained: every line of the G702 and column of the G703, a full worked pay application with retainage and stored materials, and common errors.
- What Is a Change Order?What a change order is, what it must include, how to price one with overhead and profit, and how to track change orders so extra work gets paid.
- Job Costing CalculatorCompare estimated and actual job costs line by line. See your real gross margin, which costs ran over, and how much profit fade cost you on the job.
- Bookkeeping for contractors that keeps your books tax-ready all yearContractor bookkeeping that stays current: categorized expenses, 1099 subcontractor tracking, sales tax and quarterly tax reminders, synced to QuickBooks.
- Contractor invoicing software that sends the invoice and chases the moneyTurn finished jobs into invoices the same day, send polite automatic reminders on unpaid ones, and sync invoices and payments to QuickBooks.
- QuickBooks for contractors: the right version, real job costing and a sync that keeps the books matched to the jobsQuickBooks for contractors: Online vs Desktop, job costing with projects and classes, sync pitfalls, and how BRIX keeps QuickBooks matched to your jobs.
Sources
- 26 U.S.C. §460, Special rules for long-term contracts (Cornell LII) (checked October 12, 2026)
- IRS — Rev. Proc. 2025-32 (2026 inflation adjustments), section 4.30 (checked October 12, 2026)
- FASB — Post-Implementation Review, Revenue from Contracts with Customers (Topic 606) (checked October 12, 2026)