Percentage of Completion

Percentage of Completion is a revenue recognition method that records income progressively as a project advances, in proportion to the fraction of total effort or cost incurred to date, as required for long fixed-price engagements under ASC 606 and IFRS 15.

The method matches revenue to the period in which delivery work occurs rather than the period in which the client pays or accepts a final deliverable.

The formula

The cost-to-cost approach is the most common implementation:

Percentage complete = Costs incurred to date / Estimate at completion (EAC)

Revenue to recognize = Percentage complete x Total contract value

If a $500,000 fixed-fee engagement has an EAC of $300,000 in total cost and $120,000 has been incurred to date, the project is 40% complete and $200,000 of revenue is recognized.

When the EAC is revised, the recognized percentage changes immediately. A cost overrun that pushes EAC from $300,000 to $400,000 reduces the recognized percentage from 40% to 30%, reversing $50,000 of previously recognized revenue in the current period.

Standards basis: ASC 606 and IFRS 15

Both ASC 606 (US GAAP) and IFRS 15 (international) require revenue to be recognized over time when the client simultaneously receives and consumes the benefit of the firm’s work. For most professional services engagements, this is the standard condition. Percentage of Completion is the practical implementation of over-time recognition.

Under both standards, a reliable measure of progress is required. The cost-to-cost approach qualifies as a reliable measure when costs are tracked accurately and the EAC estimate is regularly updated. If the EAC cannot be reliably estimated, both standards require revenue to be recognized only to the extent of costs incurred until a reliable estimate becomes available.

Percentage of Completion applies primarily to fixed-fee engagements. Time and materials engagements recognize revenue as hours are worked, which is effectively the same economic result achieved through a simpler mechanism.

EAC accuracy as a control risk

The accuracy of the percentage recognized is entirely dependent on the accuracy of the EAC. An EAC that understates remaining costs overstates the completion percentage and pulls revenue forward. An EAC that overstates remaining costs understates the percentage and defers revenue.

EAC must be updated at each period close, not held static at the original estimate. Delivery managers who do not revise their EAC as conditions change are not maintaining the method correctly, and the resulting revenue figures are unreliable.

This dependency is why cost overruns create accounting consequences beyond the direct margin impact. A $50,000 overrun on a large engagement does not merely reduce margin: it also reduces the recognized percentage, requiring a revenue reversal in the current period.

WIP and billing timing

Percentage of Completion creates a tracking obligation for WIP. When recognized revenue exceeds amounts billed to date, the difference is WIP, recorded as an asset. When amounts billed exceed recognized revenue, the difference is deferred revenue, recorded as a liability.

Neither outcome is inherently problematic, but both require accurate tracking. A firm with large WIP balances has a cash conversion problem. A firm with large deferred revenue balances has delivery obligations that are not yet reflected as earned income. WIP aging analysis identifies stale WIP that may need to be written off if the underlying work is no longer expected to convert to billing.

Comparison to completed-contract method

The completed-contract method defers all revenue recognition until the engagement is fully delivered and accepted. It produces simpler accounting but is not permitted under ASC 606 or IFRS 15 for engagements where delivery occurs over time. It remains relevant for short-duration engagements where the performance obligation is a single point-in-time deliverable, such as a one-day assessment with a single report output.

For multi-month fixed-fee engagements, Percentage of Completion is the required method under current accounting standards.