ASC 606 for Contractors: Revenue Recognition Guide

Your bonding company just rejected your financials. Your lender is asking questions about "contract assets" you've never heard of. Your CPA says you need to restate last year's revenue.

The culprit? ASC 606 revenue recognition and you're doing it wrong.

Here's what's at stake: contracts you can't bid on, loans you won't get, and financial statements nobody trusts. But here's the good news: once you understand ASC 606's five-step framework, you'll have cleaner books, better cash flow visibility, and the credibility sophisticated owners demand. Let's fix this.

Table of Content:

• What Is ASC 606? (And Why It's Costing You Money)

• The Five-Step Framework: Your Roadmap to Compliance

• Real-World Challenges Contractors Face

• Disclosure Requirements: What Your Financial Statements Need to Show

• Getting Started: Practical Steps for Implementation

• The Bottom Line

• Need Help With ASC 606 Compliance?

What Is ASC 606? (And Why It's Costing You Money)

ASC 606 is FASB's revenue recognition standard that fundamentally changed construction accounting.

Implementation dates:

• Public companies: 2018

• Private entities: 2019

The core change: You recognize revenue over time as work progresses, not when projects finish or when customers pay you.

Why This Matters to Your Business

Without proper ASC 606 compliance, you'll face:

• Rejected bond applications: Sureties won't accept non-compliant financials

• Lost bidding opportunities: Sophisticated owners require ASC 606 statements

• Loan denials: Banks need accurate, compliant financial reporting

• Audit failures: Restatements damage credibility and cost thousands

With correct implementation, you'll gain:

• Real-time project profitability insights

• Stronger bonding capacity

• Credibility with lenders and owners

• Accurate cash flow forecasting

The Five-Step Framework: Your Roadmap to Compliance

ASC 606 introduces a five-step model that applies to virtually every construction contract. Think of it as a checklist you'll work through for each project.

Step 1: Identify the Contract with Your Customer

Contract requirements under ASC 606:

• Approval from both parties (signed agreement)

• Clear rights and obligations defined

• Specific payment terms

• Commercial substance (it's a real business deal)

• Probable collection

Construction-specific consideration: Document all contract modifications (change orders) to determine if they're part of the existing contract or create new ones.

Step 2: Identify Performance Obligations

What's a performance obligation? Any distinct good or service you promise to deliver.

The key question: Can the customer benefit from this service independently, and is it separately identifiable?

Most common scenarios:

• Single obligation: Standard building projects where site prep, construction, and completion form one bundled deliverable

• Multiple obligations: Design-build projects where design and construction are distinct, or contracts with separately priced components

Example: Building a warehouse typically = one performance obligation (the completed warehouse). Adding HVAC maintenance for 12 months = second, separate obligation.

Step 3: Determine the Transaction Price

The transaction price is your expected payment for completing the work.

Fixed vs. Variable Consideration

Fixed amounts: The base contract price everyone agrees on upfront.

Variable consideration includes:

• Early completion bonuses

• Delay penalties or liquidated damages

• Claims for additional compensation

• Price escalation clauses

Estimating Variable Amounts

Two methods allowed:

1. Expected value method: Probability-weighted scenarios (best for multiple possible outcomes)

2. Most likely amount method: Single most probable outcome (best for binary scenarios)

The constraint rule: Only include variable consideration if it's probable you won't have to reverse significant revenue later. Translation: Don't count your bonuses before they're certain.

Documentation is critical. Support your estimates with historical data, industry benchmarks, and project-specific factors.

Read more: Fixed vs. Variable Overhead in Construction: What’s the Difference?

Step 4: Allocate the Transaction Price to Performance Obligations

Single obligation? This step is easy, 100% of the price goes to that one obligation.

Multiple obligations? Allocate based on standalone selling prices:

1. Estimate what you'd charge for each component separately

2. Calculate each component's percentage of total standalone prices

3. Allocate contract price proportionally

Example:

• Design standalone value: $100K

• Construction standalone value: $400K

• Total standalone: $500K

• Actual contract price: $450K

Allocation:

• Design gets: $90K ($450K × 20%)

• Construction gets: $360K ($450K × 80%)

Step 5: Recognize Revenue as You Satisfy Performance Obligations

This is where ASC 606 changes everything for construction contractors.

Over-Time vs. Point-in-Time Recognition

Construction contracts almost always qualify for over-time recognition when:

• You're creating/enhancing an asset the customer controls as you build

• You're creating something with no alternative use to you (custom buildings) and have enforceable right to payment for work completed

Measuring Progress: Input vs. Output Methods

Input Methods: Based on resources consumed

Cost-to-cost method (most popular):

Total costs incurred ÷ Total expected costs = % complete

• If you've spent $400K on $1M budget = 40% revenue recognized

• Requires accurate job costing and budget forecasting

Output Methods: Based on results achieved

Common measurements:

• Milestones reached (foundation, framing, rough-in, etc.)

• Units completed (apartments, square footage)

• Third-party surveys of work performed

Real-World Challenges Contractors Face

Variable Consideration and Constraints

Estimating bonuses, claims, and penalties requires judgment. You need supportable estimates backed by historical data, industry standards, and current project conditions. Document your assumptions thoroughly auditors and stakeholders will ask questions.

The constraint is equally tricky. If there's high uncertainty about whether you'll earn a bonus or successfully negotiate a claim, you may need to exclude it from revenue until the uncertainty resolves. This conservative approach prevents you from overstating income prematurely.

Change Orders Are Your Friend (and Your Headache)

Construction thrives on change orders, but ASC 606 requires careful analysis. You need to determine whether a change order is:

• A modification creating a separate contract: Treat it as a new, standalone agreement

• A modification of the existing contract treated prospectively: Adjust remaining revenue and costs going forward

• A modification treated with a cumulative catch-up: Adjust current period revenue to reflect the change as if it existed from day one

The key factors? Whether the change adds distinct goods/services and whether pricing reflects standalone selling prices. When in doubt, consult with your accounting advisor before finalizing change order pricing and timing.

Transitioning from Completed Contract or Cash Basis

Many smaller contractors historically used the completed contract method for tax purposes or cash basis for simplicity. ASC 606 requires accrual accounting with over-time revenue recognition for financial reporting.

This means maintaining two sets of books: one for financial reporting (ASC 606) and one for tax purposes. While this sounds burdensome, good construction accounting software can handle the dual tracking. The benefit? More accurate financial statements that reflect your true earning power and project performance in real time.

Disclosure Requirements: What Your Financial Statements Need to Show

ASC 606 doesn't just change how you calculate revenue, it requires enhanced disclosures that give stakeholders insight into your revenue streams and judgments.

Qualitative disclosures explain your significant accounting policies, including how you identify performance obligations, determine transaction prices, estimate variable consideration, and measure progress toward completion.

Quantitative disclosures break down revenue by major category (contract type, geographic region, timing of transfer), show opening and closing balances of contract assets and liabilities, and explain significant changes in those balances during the period.

Your balance sheet will now show contract assets (unbilled receivables when you've recognized revenue but can't bill yet) and contract liabilities (deferred revenue when you've been paid but haven't earned it yet). These replace the old "costs and estimated earnings in excess of billings" and "billings in excess of costs" accounts you may be familiar with.

The Bottom Line

ASC 606 isn't optional, and it's not going away. While the transition requires effort, the standard ultimately provides more transparent, consistent financial reporting that benefits everyone from you as the owner to your lenders, bonding companies, and potential buyers if you ever decide to sell.

The contractors who embrace ASC 606 and implement it correctly will have cleaner books, better financial insights, and stronger relationships with stakeholders who rely on their financial statements. Those who ignore it or apply it inconsistently risk audit issues, bonding problems, and lost opportunities.

Need Help With ASC 606 Compliance?

Construction Cost Accounting specializes in ASC 606 implementation for contractors. We handle WIP analysis, job costing, and financial reporting so you stay compliant without the headache.

Why Contractors Choose CCA:

• 15+ years of construction accounting expertise

• CFMA members with specialized industry knowledge

• 150+ clients trust us with their books

• Certified Sage consultants who understand your systems

Don't wait for your bonding company to reject your financials. Get ASC 606 compliant today.