Completed Contract Method for Residential Contractors
- Cost Construction Accounting
- 1 hour ago
- 6 min read
New tax rules could save you $50,000+ on your next apartment project. The Completed Contract Method (CCM) now covers multifamily developments, not just single-family homes. This means deferring all income taxes until your project finishes, keeping more cash in your business during construction.
Here's the bottom line: If you build apartments, senior living facilities, or student housing, you might qualify for significant tax savings starting with your next contract.
What Is the Completed Contract Method?
The Basics of CCM
The Completed Contract Method is an accounting approach where you recognize all revenue and expenses only when a project is substantially complete, not gradually throughout construction.
Key difference from Percentage of Completion Method (PCM):
Under PCM, you report income as work progresses (monthly or quarterly). Under CCM, nothing hits your tax return until the project finishes.
Simple Example:
You start a $2M apartment project in January. You spend $500K in year one and $1.5M in year two.
PCM: You'd report income in both years based on completion percentage
CCM: You report nothing in year one, all income in year two when complete
Bottom line: CCM defers your tax bill, improving cash flow during construction.
Who Could Use CCM Before?
Previously, CCM was restricted to:
Contractors with average annual gross receipts under the threshold (approximately $29-30 million, adjusted annually for inflation)
Home construction contracts with 4 units or fewer
This meant larger residential contractors and multifamily developers were stuck using PCM, recognizing income before collecting final payment.
That restriction just changed.
What Changed? The Expansion You Need to Know
New Rules for Residential Contractors
Recent legislation expanded CCM eligibility for "residential construction contracts."
What now qualifies:
Multifamily apartment buildings (any size)
Senior living facilities
Student housing complexes
Assisted living facilities
Mixed-use buildings (if at least 80% residential by square footage)
The 4-unit cap is gone. A 50-unit apartment project now qualifies just like a duplex.
Who Can Use CCM?
Size thresholds:
You can use CCM if your average annual gross receipts over the prior 3 years don't exceed the current threshold (adjusted annually for inflation, currently around $30 million).
If you exceed this threshold: You may still qualify for the small contractor exception under different rules, but CCM eligibility becomes more restrictive.
Additional Relief for Qualifying Projects
If your residential project is expected to complete within 3 years from contract start, you're exempt from:
Look-back interest calculations
Certain PCM requirements
This removes administrative headaches for typical residential timelines.
Critical Timing Detail
These rules apply to contracts entered into after the effective date of the new legislation.
Important: Existing contracts continue under prior rules unless modified. Consult your tax advisor about specific contract timing and applicability.
CCM Benefits: Why Residential Contractors Are Paying Attention
Cash Flow Advantages
Tax deferral = more working capital
When you defer income recognition, you defer the tax bill. That cash stays in your business for:
Purchasing materials
Meeting payroll
Covering subcontractor draws
Managing project overruns
Real-world impact:
A $3M multifamily project completed over 18 months might generate $300K in profit. Under PCM, you'd pay taxes on portions of that profit in year one. Under CCM, the entire tax liability waits until year two when you've actually collected.
Simplified Accounting
Less administrative burden:
No monthly percentage-of-completion calculations
No estimated cost-to-complete updates
Fewer journal entries throughout the project
Reduced accounting fees
For contractors juggling multiple projects, CCM means less time reconciling work-in-progress schedules and more time running jobs.
Better Alignment with Cash Position
CCM matches tax liability with actual cash collection.
You're not reporting profit (and paying taxes) on projects where you:
Haven't received final payment
Are waiting on retainage
Have outstanding change orders
Face payment disputes
This alignment reduces the frustrating scenario of owing taxes on income you haven't collected yet.
CCM Drawbacks: When It Doesn't Make Sense
Income Bunching Creates Tax Spikes
The flip side of deferral:
All profit recognition hits in one tax year potentially pushing you into higher tax brackets.
Example scenario:
You complete three multifamily projects in the same year, each with $200K profit. That's $600K in taxable income in one year, versus spreading it across multiple years under PCM.
The result:
Higher effective tax rate
Potential estimated tax penalties if you underpay
Need for significant cash reserves at project completion
Planning requirement: You must set aside funds throughout the project to cover the eventual tax bill.
Lender and Bonding Concerns
Financial reporting complications:
Banks and surety companies often require financial statements showing current income not deferred under CCM.
Potential issues:
Lower reported revenue reduces borrowing capacity
Debt covenant violations if revenue ratios drop
Bonding capacity limitations
Solution: Many contractors maintain separate books: CCM for tax purposes, PCM or accrual for financial reporting. This adds cost and complexity.
State Tax Conformity Problems
Critical consideration:
Not all states automatically adopt federal tax law changes. Your state may:
Not recognize CCM for state taxes
Require PCM regardless of federal method
Have different eligibility thresholds
Action item: Check with your CPA about your specific state's rules.
IRS Scrutiny on "Substantial Completion"
Audit risk area:
The IRS watches carefully when contractors claim projects are "complete" for CCM purposes.
Gray areas:
Minor punch list items remaining
Waiting on final inspections
Landscaping or exterior work pending
Common area finishes in multifamily projects
Your exposure: Aggressive completion dates could trigger audits and penalties if the IRS disagrees with your determination.
Is CCM Right for Your Business? Decision Framework
Start With These Four Questions
Before switching methods, evaluate:
Do your projects qualify as residential construction contracts?
Will you complete projects within 2-3 years typically?
Would deferring income recognition improve your cash position?
Can you handle potential tax spikes in completion years?
CCM Works Best For:
Ideal candidates:
Multifamily developers now newly eligible under expanded rules
Contractors with steady project pipelines (completions spread across years, avoiding bunching)
Businesses with strong cash reserves to handle deferred tax bills
Fixed-price contract specialists where cost certainty exists
Growing companies where deferral funds expansion
Project sweet spot: $1M-$10M residential contracts with 12-24 month timelines
Example profile: A regional contractor completing 4-6 multifamily projects annually, each taking 18 months. Completions stagger across tax years, avoiding massive income bunching.
Consider Alternatives If:
CCM may not fit when:
You need current revenue recognition for financing requirements
Projects regularly exceed 3-year timelines (losing exemptions)
You operate in multiple states with non-conforming tax rules
Your project mix includes commercial work (method consistency issues)
You have inconsistent completion schedules (risk severe bunching)
Cash flow is already tight (deferred taxes create year-end crunch)
Alternative methods:
Cash method: Available to contractors under gross receipts threshold; simpler than both CCM and PCM
Hybrid method: Different approaches for different project types
PCM with cash flow planning: Stick with current method, improve tax planning
Action Steps: Preparing for Implementation
Timeline for Implementation
Phase 1: Assessment (Months 1-3)
Review your project pipeline
Identify contracts qualifying as residential
Calculate your 3-year average gross receipts
Assess current accounting system capabilities
Phase 2: Planning (Months 3-6)
Consult with your CPA or tax advisor
Model cash flow scenarios under CCM vs. current method
Verify state tax conformity issues
Discuss implications with lender/surety if applicable
Phase 3: Preparation (Months 6-9)
Update accounting systems and procedures
Train staff on CCM requirements
Develop substantial completion criteria
Create tax reserve planning process
Phase 4: Implementation (Months 9-12)
Make final method election decisions
Prepare for new contract execution
Update contract templates if needed
Brief project managers on revenue recognition changes
Don't Rush the Decision
Take time to plan properly. A hasty switch to CCM without understanding the implications could create more problems than it solves.
Final Thoughts: Don't Leave Money on the Table
The recent expansion of the Completed Contract Method represents a significant change to residential construction accounting. For multifamily contractors previously stuck with percentage-of-completion, CCM offers legitimate tax deferral and cash flow benefits.
But it's not automatic.
The decision requires careful analysis of your:
Project types and timelines
Financial reporting needs
State tax situation
Cash management capabilities
Schedule a consultation with Construction Cost Accounting before bidding your next qualifying project. The right accounting method choice could save thousands in taxes and improve your competitive position.
Don't wait until tax season to wish you'd planned differently.
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