Income and losses are recognized in the year the contract is finished under the completed contract method in Arkansas construction accounting.

Completed Contract Method: When income and loss show up on the books

If you’ve spent time around construction projects, you’ve probably heard about different ways to recognize revenue and expenses. The completed contract method is one of those approaches that can feel almost old-fashioned, but it’s still relevant for certain long-running jobs. For Arkansas contractors and the folks studying the financial side of construction, understanding this method helps you read financial statements more clearly and avoid surprises when a project wraps up.

What the completed contract method actually is

Think of a big, long-haul construction job—say a new office building or a bridge project that spans a couple of years. With the completed contract method, you don’t put revenue or costs on the income statement as work progresses. Instead, you wait until the entire contract is finished. Only then do you recognize all the income and all the expenses tied to that contract.

Why folks use it isn’t magic; it’s mostly practicality. If the project is risky or if costs and potential income are hard to estimate during the work, this method avoids juggling a lot of uncertain numbers month after month. It also gives a clean, final view of profitability once everything is complete because you’re not piecing together revenue and costs year by year.

Let me explain with a simple picture: you bill, you spend, you accrue more costs, but none of that shows up until the last crane comes down and the punch list is done. Then, in one big moment, the project’s profit or loss appears on the books.

When income and losses are reported under this method

The short and precise answer for “when” is: in the year the contract is completed. That’s the heart of the method. Here’s how it plays out in real life, in steps you can picture:

• Start of the contract: costs begin to accumulate, but revenue is not yet recognized.

• During the build: you record expenses as they happen, but you don’t book any related revenue.

• End of the contract: you wrap up all remaining costs, finalize any disputes, and recognize all revenue and expenses in a single year.

• After completion: you close out the file, and the contract’s profit or loss has a single, clear appearance in the financial statements.

Why this timing matters for project cash flow and clarity

• Cash flow alignment: for some projects, cash receipts lag or come in big chunks at the end. The completed contract method can align revenue recognition with the point you’re sure the project is done, which sometimes fits the actual cash flow picture better than constant interim recognition.

• Fewer estimates during build: guesswork about what costs will end up being and what revenue will look like is still a factor in many contracts, but this method minimizes the need to update those estimates as work goes on.

• Simpler reporting in some cases: instead of wrestling with progress billings, billings on schedules, and percentage-of-completion calculations, you keep a cleaner ledger until completion.

A quick contrast: percentage-of-completion vs. completed contract

If you’re learning about construction accounting, you’ll hear about the percentage-of-completion method as the other big option. Here’s how they differ, in plain terms:

• Percentage of completion: revenue and costs are recognized as work progresses. You record a portion of the total expected profit each period, based on the stage of completion. This can give a more continuous picture of performance, but it requires ongoing estimates and adjusting for changes in expectations.

• Completed contract: revenue and costs are delayed until the end. You get a big, final number in the year the project finishes, which can simplify things if estimates are uncertain but delay profitability visibility.

Neither method is “wrong.” Each has its own fit depending on contract type, risk, and the owner’s payment schedule.

Arkansas context: why this matters for local builders

Construction in Arkansas includes a mix of municipal, state, and private projects. The choice of accounting method isn’t just about accounting theory; it affects taxes, reporting, and how lenders view project performance. In some cases, a contractor’s mix of short-term and long-term contracts can push you toward one method or the other for clarity and risk management.

A practical tip for Arkansas contractors: keep a sharp eye on your contract terms and the likelihood of disputes or changes in scope. If those factors are high, a completed contract approach can prevent endless rewrites of revenue and cost projections during the build. But if you’re dealing with highly predictable costs and regular progress payments, a percentage-of-completion approach might pull more meaningful insights earlier.

Common questions that come up about the method

• Q: If the contract is long, can I still use the completed contract method?

A: Yes, that’s one of the classic scenarios. It’s especially common for very long or highly uncertain projects where interim estimates would be shaky.

• Q: Is this method mainly for tax or for reporting to investors?

A: It serves both sides in different ways. It can simplify financial reporting during the build and provide a clean profit picture after completion, which some tax and regulatory rules consider.

• Q: What happens if a project is canceled before completion?

A: If a contract is canceled, you recognize the costs that are determinable and any recoveries you can secure. The exact treatment depends on the nature of the cancellation and applicable rules.

• Q: Can I switch methods after starting a contract?

A: Switching methods mid-stream is generally not common and can be restricted by accounting standards. It’s wise to consult a professional if you’re reconsidering which path best fits your portfolio.

Practical takeaways you can apply

• Know your contracts: If you’re evaluating a long-term project in Arkansas, ask the question, “Will the end of the job bring a clear, final number, or will ongoing estimates be part of the picture?” The answer points you toward or away from the completed contract method.

• Simplify where you can: If uncertainties are high and the project is not giving you reliable progress indicators, delaying revenue and expense recognition until completion can reduce ongoing complexity.

• Combine with solid cost tracking: Even though you don’t recognize income until the end, you still accumulate and track costs throughout the project. Keep meticulous records of every labor hour, material purchase, subcontractor cost, and overhead that ties to the contract.

• Think about the bigger picture: How does this choice affect your tax posture, your lender’s comfort, and your business’s overall financial health? Sometimes a yearly view of profitability matters more to your financial planning than a quarterly snapshot.

A few practical examples to anchor the idea

• Example 1: A two-year hospital wing project starts with planning and procurement. Costs accumulate year one, but revenue isn’t recognized. In year two, when the build is complete and the project is accepted by the owner, you recognize both revenue and all costs in that final year, showing the full picture of profitability in one place.

• Example 2: A road resurfacing contract that stretches just under a year but with many change orders. If the scope remains uncertain or payments are irregular, some contractors prefer to hold off on revenue until completion to avoid chasing a moving target.

• Example 3: A large school renovation with slow, predictable cost buildup but a fixed completion date. In this case, the completed contract method can still offer a straightforward finish line, even if the progress payments aren’t perfectly aligned with costs along the way.

Let’s wrap it up with a simple frame of mind

The completed contract method isn’t about hiding numbers; it’s about choosing a lens that fits certain kinds of projects. When you’re dealing with long, risky, or highly uncertain contracts, postponing income and expense recognition until completion can bring clarity and reduce ongoing guesswork. For Arkansas builders, where project landscapes vary from small municipal jobs to big infrastructure efforts, this method remains a practical tool in the accounting toolkit.

If you’re reflecting on which approach suits a given contract, start with the basics: how predictable are costs, how stable is the payment schedule, and how important is a clear end-of-project profitability figure. Then weigh the pros and cons against your business goals. And if you run into tricky details—like tax implications or regulatory considerations—don’t hesitate to talk with a seasoned accountant. A quick conversation can save you a lot of headaches later.

Key takeaways at a glance

• The completed contract method recognizes income and losses in the year the contract is completed.

• It defers revenue and expenses until the project’s finish, offering a clean final profitability picture.

• It’s particularly useful for long-term, uncertain projects where ongoing estimates are risky.

• It contrasts with percentage-of-completion, which recognizes revenue as work progresses.

• In Arkansas, as elsewhere, the choice should fit contract characteristics, cash flow realities, and overall financial strategy.

If you’re exploring the nuances of construction accounting in Arkansas, this method is a good example of how timing and risk shape financial reporting. It’s all about choosing the right moment to bring the project’s financial story to light—when the last nail is driven, the last cost is counted, and the project’s true profitability shines.