Completed Contract Method: A Simple Guide for Contractors

Choosing the right revenue recognition method can significantly impact your construction company’s financial health and tax obligations. For contractors managing multiple projects with varying timelines and cost certainty, understanding when and how to apply the completed contract method becomes crucial for accurate financial reporting.

Key Takeaways

• The completed contract method (CCM) defers all revenue and expense recognition until project completion, making it ideal for short-term or highly uncertain construction contracts

• CCM is GAAP-compliant but limited to contracts completing within one year or projects where progress cannot be reliably measured

• Under CCM, costs accumulate as work-in-progress assets while customer payments become liabilities until the project finishes

• While CCM simplifies accounting and can defer tax liabilities, it creates income volatility and limits financial performance visibility during projects

• The percentage of completion method is generally preferred for long-term contracts as it provides smoother revenue recognition and better financial insights

The completed contract method represents one of the fundamental accounting methods available to construction companies, offering a conservative approach to recognizing revenue that can be particularly valuable in specific project circumstances. While most construction companies have migrated toward the percentage of completion method, CCM remains a viable option for certain types of construction contracts and business situations.

This comprehensive guide will walk you through everything you need to know about the completed contract method, from basic definitions to practical implementation strategies that can help your construction business make informed accounting decisions.

What Is the Completed Contract Method?

The completed contract method is an accounting approach that postpones revenue and expense recognition until the contract is completed. Unlike other methods that recognize income as work progresses, CCM treats the entire project as a single unit, deferring all financial reporting impact until the construction project is finished.

Primarily used in the construction industry for projects with uncertain costs or timelines, CCM follows accrual accounting principles but delays income statement effects until project delivery. This method allows construction companies to maintain conservative financial reporting by recognizing revenue only when the contractor has substantially completed their obligations and transferred control to the project owner.

The core principle of CCM is that revenue recognition occurs when the earning process is complete and collection is reasonably assured, typically when the project owner accepts the finished work and all contractual obligations are met.

Construction accounting differs significantly from other industries due to the unique nature of construction projects that often span multiple accounting periods and involve complex cost structures. The completed contract approach acknowledges these complexities by providing a straightforward method for revenue recognition that eliminates the need for complex progress estimates during the contract period.

When Should Contractors Use the Completed Contract Method?

The decision to use the completed contract method depends on specific project characteristics and business circumstances. Construction companies should carefully evaluate each contract against established criteria to determine the most appropriate revenue recognition method for their situation.

Projects with Unpredictable Costs

Construction contracts with frequent change orders or unclear client specifications are ideal candidates for the completed contract method. When project scope is fluid or client requirements evolve, estimating completion percentages becomes difficult.

Projects with unknown site conditions or complex regulations also benefit from CCM. Environmental remediation or historic renovations often face unexpected challenges, making reliable cost estimates hard until completion. The cash method simplifies accounting by avoiding ongoing cost projections.

Custom construction with uncertain initial costs suits CCM. Specialized installations or unique architectural features create unpredictable costs, making percentage completion calculations unreliable.

Renovation projects with hidden structural issues also fit CCM. Unexpected problems during work can invalidate original cost estimates, making deferred revenue recognition preferable to tracking completion percentages.

Short-Term Contracts

Construction projects expected to complete within 12 months often work well with the completed contract method. Small residential projects like bathroom or kitchen remodels typically fall into this category, where the entire project cycle occurs within a single accounting period.

Emergency repair contracts with immediate completion timelines also benefit from CCM’s simplified approach. When construction businesses respond to urgent situations like storm damage or equipment failures, the focus is on rapid completion rather than ongoing accounting calculations.

Specialty installations completed within one accounting period, such as pool installations or deck construction, are another appropriate use case. These projects suit CCM when timelines are short and outcomes predictable.

While CCM simplifies accounting for short-term contracts, multiple projects completing simultaneously can cause income spikes, creating challenges for cash flow and financial planning.

Uncertain Completion Timelines

Projects dependent on weather or seasonal factors often justify using the completed contract method. Construction in regions with harsh winters or monsoon seasons may face delays, making percentage completion estimates unreliable.

Contracts delayed by permits or regulatory approvals also suit CCM, as uncertain timelines make premature revenue recognition risky.

Complex commercial projects with multiple stakeholders and infrastructure projects facing environmental or legal constraints benefit from deferred revenue recognition, avoiding inaccurate progress-based accounting due to timeline variations.

How the Completed Contract Method Works in Practice

Understanding the mechanics of completed contract method implementation requires examining how construction companies track costs, handle customer billing, and manage the transition from work-in-progress to completed contract status. The process involves careful coordination between project management and the accounting team to ensure accurate cost accumulation and proper timing of revenue recognition.

The method recognizes revenue and expenses differently than traditional business models, creating unique balance sheet and income statement patterns that construction businesses must understand for effective financial management. Unlike service businesses that typically record revenue when earned, construction companies using CCM defer revenue until the entire project delivers value to the customer.

Revenue Recognition Under CCM

No revenue is reported on the income statement during construction when using the completed contract method. Unlike other methods that recognize income as work progresses, CCM records all contract revenue at once upon project completion. This can cause significant revenue fluctuations, especially for companies managing multiple projects with varying completion dates.

Revenue is recognized when the client accepts final delivery and all contractual obligations are met, shifting accumulated costs and billings from the balance sheet to the income statement. The total contract price is recorded in a single period, regardless of project duration, impacting financial performance and cash flow management.

Cost Tracking and Accumulation

Direct costs such as materials, labor, and equipment accumulate as construction-in-progress assets during the project. The accounting system tracks all costs to provide a clear picture of project investment until completion.

Indirect costs like overhead, insurance, and utilities are allocated to work-in-progress accounts using consistent methods. Clear cost allocation ensures accurate project costing and financial reporting under CCM.

Subcontractor payments are tracked separately within the project cost structure, helping monitor different cost categories and maintain audit trails.

All costs remain on the balance sheet until project completion, when they transfer to the income statement as cost of goods sold. This process requires reliable construction accounting software and careful job cost monitoring for accuracy.

Customer Billing and Payments

Progress payments from customers create liabilities rather than revenue under the completed contract method. These billings on uncompleted contracts represent the construction company’s obligation to complete the contracted work, forming a liability distinct from typical business revenue.

Cash received from project owners is treated as an obligation to fulfill the contract, reflecting that revenue is not yet earned. This conservative approach aligns revenue recognition with project completion, consistent with accrual accounting principles.

Billing does not trigger revenue recognition during construction, regardless of payment timing or contract terms. Revenue and final payment are recognized simultaneously upon project completion, ensuring financial reporting accurately reflects contract fulfillment.

CCM vs Percentage of Completion Method: Key Differences

The choice between completed contract and percentage of completion methods represents one of the most significant decisions construction companies face when establishing their accounting system. Each approach offers distinct advantages and creates different patterns of financial reporting that can significantly impact business operations and stakeholder perceptions.

Aspect	Completed Contract Method	Percentage of Completion Method
Revenue Recognition Timing	Upon project completion only	Over time, based on work performed
Cost Estimation Requirements	No ongoing estimates needed	Requires reliable cost and progress estimates
Financial Statement Impact	Revenue/expense concentrated in completion period	Revenue/expense smoothed over project timeline
Cash Flow Visibility	Limited visibility during projects	Better ongoing financial performance indicators
Administrative Complexity	Simpler record-keeping	More complex progress tracking and estimation
GAAP Compliance	Limited to qualifying contracts	Preferred method for most long term projects

The fundamental difference lies in timing: the completed contract method defers all revenue and expense recognition until project completion, while the percentage of completion method recognizes revenue proportionally as work progresses. This timing difference affects financial statements and business operations.

Under CCM, companies may report little revenue for extended periods, followed by large spikes at project completion. In contrast, the percentage of completion method provides steadier revenue streams that better reflect ongoing activity.

Both methods use accrual basis accounting, but CCM can cause mismatches between cash receipts and reported revenue, complicating financial planning for construction businesses.

Advantages and Disadvantages of the Completed Contract Method

Construction companies considering the completed contract method must weigh significant benefits against notable limitations. The decision impacts everything from daily accounting operations to long-term financial planning and stakeholder relationships.

Advantages of CCM

The completed contract method reduces the risk of overstating profits on uncertain projects by deferring revenue recognition until completion. This conservative approach simplifies accounting by avoiding complex progress estimates and focusing on accurate cost tracking.

CCM can also defer tax liabilities until project completion, aiding cash flow management. It appeals to lenders and stakeholders who prefer cautious financial reporting, especially for short-term or unpredictable projects.

Disadvantages of CCM

CCM causes income volatility with large revenue spikes at project completion, complicating financial planning. It limits visibility into ongoing financial performance, making management and stakeholder communication harder.

Financial forecasting is challenging due to revenue recognition depending on project completion timing, which can be unpredictable. For long-term projects, CCM may not reflect true economic activity, and cash flow management can be difficult since progress payments are treated as liabilities rather than revenue.

GAAP Compliance and CCM Requirements

Current GAAP standards under ASC 606 have tightened the use of the completed contract method, limiting it to contracts expected to finish within one year or projects where progress cannot be reliably measured. This reflects a preference for revenue recognition methods that show ongoing financial performance.

ASC 606 favors recognizing revenue over time as customers receive benefits, making CCM an exception rather than the norm. Private companies have more flexibility but must still meet strict criteria to justify CCM use.

Importantly, expected losses must be recognized immediately under CCM, maintaining conservative accounting principles. Construction companies must keep detailed documentation proving contracts qualify for CCM and that alternative methods would not provide better financial information. This ensures compliance despite added administrative effort.

Journal Entries and Accounting Examples

Understanding completed contract method implementation requires examining specific journal entries and real-world scenarios that demonstrate how construction companies record transactions throughout the project lifecycle. These examples illustrate the unique balance sheet treatment and eventual income statement recognition that characterizes CCM accounting.

The accounting process involves three distinct phases: cost accumulation during construction, progress billing management, and final recognition upon completion. Each phase requires specific journal entries that maintain accurate records while deferring income statement impact until project delivery.

Real-World CCM Example: Johnson Construction

Consider Johnson Construction’s $500,000 commercial renovation project starting January 2024. This example demonstrates how costs accumulate as assets while customer payments create liabilities throughout the construction period.

During Year 1, Johnson Construction incurs $200,000 in direct costs including materials, labor costs, and equipment rental. The company records these costs as construction-in-progress assets rather than immediate expenses:

Dr. Construction in Progress - Johnson Project    $200,000

    Cr. Cash/Accounts Payable                              $200,000

Simultaneously, Johnson bills the customer $300,000 for progress payments during Year 1. Under CCM, these billings create liabilities rather than revenue:

Dr. Accounts Receivable                          $300,000

    Cr. Billings on Uncompleted Contracts              $300,000

At Year 1 end, Johnson’s balance sheet shows $200,000 in construction-in-progress assets and $300,000 in billing liabilities, with no impact on the income statement. This treatment reflects the incomplete nature of the construction contract under the completed contract approach.

Year 2 brings project completion with additional costs of $250,000, bringing total project costs to $450,000. Upon completion, Johnson recognizes the entire contract:

Dr. Construction Contract Revenue                $500,000

    Cr. Billings on Uncompleted Contracts               $300,000

    Cr. Accounts Receivable (final billing)             $200,000

Dr. Construction Contract Costs                  $450,000

    Cr. Construction in Progress                         $450,000

This final recognition shows $500,000 revenue, $450,000 costs, and $50,000 gross profit appearing simultaneously on the income statement. The balance sheet clears all project-related assets and liabilities, reflecting the completed transaction.

Loss Recognition Under CCM

Even under the completed contract method, accounting principles require immediate recognition of expected losses, demonstrating the conservative nature of construction accounting. Consider a $300,000 contract where Johnson Construction expects total costs of $350,000.

Upon determining the expected loss, Johnson must immediately recognize the $50,000 loss provision:

Dr. Provision for Contract Loss                 $50,000

    Cr. Estimated Loss on Uncompleted Contract          $50,000

This entry recognizes the loss immediately while the project continues under CCM for any remaining profit recognition. When the project completes, Johnson records final entries to clear all accounts and recognize any differences between estimated and actual results.

The loss recognition requirement ensures that the completed contract method maintains conservative accounting principles while preventing companies from hiding anticipated losses until project completion. This approach protects stakeholders by providing timely information about problematic contracts.

Construction Contract Accounting Services

Navigating the complexities of construction contract accounting can be challenging, but our expert CCA services are designed to simplify this process for your business. We specialize in providing tailored construction accounting solutions that ensure accurate revenue and expense recognition, compliance with generally accepted accounting principles (GAAP), and effective management of construction costs throughout your projects. Whether you're handling short-term contracts or large-scale developments, our team leverages advanced construction accounting software and proven methodologies to deliver timely financial insights, optimize tax strategies, and support your company’s financial health and growth. Trust us to help you maintain a clear and accurate picture of your project completion percentages and overall financial progress, so you can focus on building success.