The percentage of completion method reveals long-term contract profitability in construction accounting

Outline:

• Hook with a concrete, everyday construction scenario

• Explain what the percentage of completion method is in simple terms

• Why it matters, especially for long-term contracts

• How it helps a contractor see profitability and manage risk

• A quick contrast with other methods, and Arkansas/NASCLA-relevant context

• Practical takeaways and a closing nudge to think like a financially aware contractor

Now, the article

Why the percentage of completion method matters in accounting—and what it means for long-term contracts

Let me ask you this: you’re juggling a big project that takes months, even years, to finish. You bill as you go, you incur costs as you work, and you want to know, pretty much month by month, whether the thing is going to end up profitable. If that sounds familiar, you’ve touched the heart of the percentage of completion method.

What is this method, in plain language? It’s a way to recognize revenue and the related costs as the project actually progresses, not all at once when the last nail goes in. Instead of waiting until a project is complete, you measure how much work has been done and then record a slice of revenue and expenses that corresponds to that portion of the project. It’s basically “revenue and costs in step with progress.” This is especially useful on long-term contracts—bridges, highways, large commercial builds—where a job can span many months or years.

Why is this significant, especially for Arkansas contractors dealing with NASCLA-related contexts? Because it gives you a living, breathing snapshot of a project’s fortunes as you go. You don’t have to wait for a year-end report to see if the numbers are headed in the right direction. You can spot trouble early—costs that are creeping up, delays that shrink profit, or changes in scope that alter the math of the job.

Let me explain why this approach is so practical. When you use the percentage of completion method, you’re tying financial results to actual work performed. The key inputs are: how much of the total project costs you’ve incurred to date, how much you expect to incur for the remaining work (the estimate to complete), and how much of the project you’ve completed in terms of physical progress. By comparing those numbers, you derive revenue to recognize and the corresponding gross profit for the period.

Think about it from a contractor’s day-to-day perspective. You might be on site, laying foundations, pouring concrete, installing steel, and chasing suppliers for materials. Some tasks come in earlier in the schedule; others wrap up later. If you waited to book all revenue after the project finishes, you’d miss the chance to reflect ongoing performance, and your cash flow would look bumpier than a freshly paved road. The percentage of completion method smooths that out a bit, giving lenders, investors, and internal management a clearer view of where you stand.

What makes this approach especially important for the profitability of long-term contracts? Because it aligns revenue with the actual work completed, you get a more accurate picture of project profitability as you go. If costs escalate or if the project starts running behind schedule, you’ll see a dip in anticipated profitability sooner rather than later. That early visibility is precious. It lets you revisit budgets, reallocate resources, or renegotiate terms with subs and suppliers before the issue snowballs.

Let’s put a practical lens on it. Imagine a road-widening project that’s 40 percent complete halfway through the year, with 30 percent of the total costs already incurred. Under the percentage of completion method, you’d recognize about 40 percent of the expected revenue and the associated gross profit for that year, assuming estimates to complete haven’t shifted dramatically. If, down the road, you discover that the job will cost more than planned, you update the remaining cost estimate and adjust future revenue recognition accordingly. This is where the method earns its keep: it’s dynamic, not static. It mirrors the reality on the ground.

In Arkansas, this method isn’t just a tidy accounting tool; it’s a practical frame for reporting on long projects in a state with infrastructure needs and a mix of public and private work. Contractors often deal with contracts that span seasons and budgets that require close coordination with project managers, engineers, and financiers. The percentage of completion method helps keep all those stakeholders on the same page about progress, profitability, and risk tolerance. It supports transparent conversations about pricing, change orders, and anticipated cash flows. When you can point to the percentage completed and the corresponding revenue and costs, it’s easier to justify decisions and timelines to your team, clients, or a bondholder.

A quick contrast to keep the idea sharp: why not the completed-contract method? In that approach, you’d defer all revenue and profit until the job is finished. For a multi-year project, that means a long stretch with little recognizable income, even if you’ve spent a lot on labor and materials. Cash flow can become erratic, and stakeholders might worry that the project won’t break even until the end. The percentage of completion method addresses that concern by providing ongoing visibility. It’s not that one method is universally “better”—it’s about the context of the project, the risk profile, and the needs of the business. For long-term construction tasks, the progressive approach tends to offer a truer, more useful picture.

Of course, there are caveats. The method relies on reliable estimates of total costs and the percentage of work completed. If estimates are off, you’ll see your revenue and profit drift in ways you didn’t expect. That’s why seasoned contractors keep a close eye on job costing, change orders, and monthly progress measurements. You’ll often see a rotation of tools in use: cost-to-cost tracking, percentage complete calculations, and robust estimation processes for the “to complete” figure. In practice, that means frequent communication with project managers and a careful, methodical approach to updating forecasts as the project unfolds.

So, what does this mean for someone studying topics related to the Arkansas NASCLA contracting landscape? It means understanding how revenue recognition ties to project progression is foundational for accurate financial reporting, risk management, and the ability to communicate true project health. It also connects to broader accounting frameworks you might encounter, like GAAP guidelines for long-term contracts and the way costs are tracked against earned revenue. If you’re exploring this field, you’ll see the same core ideas pop up across different contract types—the same need to reflect real progress in the numbers, month by month.

A few practical notes you can keep in mind:

• Start with the “costs incurred to date” and compare them to the total estimated costs. This ratio helps you gauge progress and forecast profitability.

• Revisit the estimate to complete regularly. Changes in scope, labor rates, or material costs can tilt the math quickly.

• Track billings versus costs carefully. When you bill against progress, you may encounter “billings in excess of costs” or the opposite; understanding this helps with cash flow planning.

• Communicate clearly with stakeholders. The value of the method is not just in the numbers, but in the confidence it gives to everyone involved that the project’s status is understood.

The big takeaway? The percentage of completion method is significant because it provides a real-time lens on the profitability of long-running contracts. It ties the financial results to actual work performed, helping contractors manage risk, plan resources, and present a transparent picture to lenders, partners, and clients. For Arkansas projects—whether a highway improvement, a school addition, or a commercial complex—the method offers a practical, timely view of how a job is performing financially.

If you’re moving through topics tied to the Arkansas NASCLA contractor ecosystem, keep this thread in mind: long-term contracts demand a way to reveal progress in numbers as well as on the ground. Revenue recognition that mirrors work completed isn’t just a technical choice; it’s a decision that informs budgeting, scheduling, and strategic planning. And when you can explain your numbers in simple terms—what portion of the job is done, what costs have been incurred, and what remains—you’re not just doing accounting. You’re communicating a project’s life cycle, honestly and efficiently.

A closing thought to carry with you: every project has its own rhythm. Some phases go smoothly, others surprise you with a late change order or an unexpected spike in material costs. The percentage of completion method respects that rhythm, letting you adjust as you go rather than pretending the cadence doesn’t exist. It’s a practical tool for the real world of construction in Arkansas, helping you keep the books straight, the plan practical, and the project on a path toward successful completion.

In short, B is the centerpiece of the discussion: it offers insight into the profitability of long-term contracts. And that insight—the ability to see where a project stands financially as it unfolds—can be the difference between a solid, well-managed job and one that’s tougher to justify with a lender or a client. For contractors navigating the Arkansas landscape, that clarity isn’t a luxury; it’s a core capability.