YOUR P&L MIGHT BE
SHOWING THE WRONG
REVENUE NUMBER.
Revenue recognition on long-term construction contracts determines when revenue appears on the P&L. The percentage of completion method recognizes revenue as work progresses. The completed contract method recognizes it all at project close. Using the wrong method — or applying it inconsistently — produces a P&L that doesn't reflect the actual financial health of the business.
A subcontractor with three large projects in progress can look very different on a P&L depending on how revenue is recognized. Under completed contract, a business doing $6M of work might show $1M of revenue in the current period because only one project has closed. Under percentage of completion, the same business shows $4.5M — reflecting actual work performed. Banks, sureties, and the IRS have specific requirements. Using the wrong method for your context creates problems with each of them.
HOW REVENUE GETS
RECOGNIZED IN CONSTRUCTION.
Revenue Recognized as Work Progresses
Revenue is recognized in proportion to the percentage of the contract completed — measured by costs incurred to date divided by total estimated costs. A $1M project that's 60% complete by cost recognizes $600K of revenue. This method produces a P&L that tracks the actual economics of the business as work is performed.
Revenue Recognized at Project Close
Revenue and costs are deferred until the project is substantially complete. A business with three $2M projects in progress shows none of their revenue until each project closes. This creates significant P&L volatility — big revenue months when projects close, minimal revenue months when they're in progress.
For most commercial subcontractors doing $1M–$12M: Percentage of completion is the correct method for financial reporting, WIP schedules, and banking/bonding purposes. Completed contract is sometimes used for tax purposes. Using completed contract for internal management decisions produces a P&L that doesn't reflect actual performance.
HOW REVENUE RECOGNITION
CONNECTS TO WIP.
The WIP schedule — work in progress report — is the mechanism that drives percentage of completion accounting. It shows, for every active project: contract value, costs to date, estimated cost to complete, percent complete, earned revenue, and billed to date.
The difference between earned revenue and billed to date is either overbilling (billed more than earned) or underbilling (earned more than billed). Both matter for financial reporting, banking, and bonding.
Billed More Than Earned — a Liability
If a project is 40% complete by cost but 60% billed, you've received payment for work not yet performed. That's a liability — you owe performance. Sureties count this against your financial position.
Earned More Than Billed — a Hidden Asset
If a project is 60% complete by cost but only 40% billed, you have $200K of earned revenue not yet billed. That's an asset. If it doesn't show on your WIP schedule, it's invisible to banks and sureties — and your balance sheet is understated.
WHAT WRONG REVENUE RECOGNITION
COSTS YOU.
SPM runs WIP schedules monthly for every CFOS client. Every active project is tracked by earned revenue, billed to date, and overbilling/underbilling status. The financial statements reflect actual project performance — not just closed-project revenue. See the WIP reporting module →
