Which accounting method recognizes income as it is earned during a construction project?

The percentage of completion method recognizes income as it is earned throughout the duration of a construction project. This accounting method allows contractors to recognize revenue based on the progress made on the project, typically measured by the proportion of work completed relative to the total expected costs.

For instance, if a contractor estimates that a project will cost $1 million and they have incurred $400,000 in costs to date, they may recognize 40% of the total expected revenue already, reflecting the work completed so far. This approach aligns income recognition closely with the actual work performed, providing a more accurate picture of financial performance and project profitability over time.

This method is particularly advantageous for construction projects that span multiple accounting periods, as it helps stabilize income reporting and gives stakeholders a clearer understanding of ongoing operations. Using this method can be essential for long-term contracts, as it appropriately matches revenues with the expenses incurred to earn those revenues.