What is percentage of completion (POC) method in construction?
If you’ve worked on long-term jobs that stretch out over months, you’ll know just how difficult it can be to keep up with income and expenses as the job progresses. It’s easy to find yourself in a position where you’ve overbilled or underbilled, especially on projects that have gone on longer than you might have expected. This is where percentage of completion (POC) accounting can be extremely helpful.
POC is a common accounting process contractors use on long-term jobs to determine income and expenses based on the percent of work completed. Instead of calculating a lump sum at the end of a contract, POC lets you pull revenue and cost data on a monthly basis, or as a job reaches certain milestones.
- Percentage of completion (POC) is an accounting method contractors use to determine income and expenses based on how far along a job is.
- POC is particularly helpful for long-term jobs, and is calculated either monthly, or as a job reaches certain milestones.
- With consistent POC reporting, you can make sure your reported revenue and cost numbers match as closely as possible with the actual billing and spending on the job.
In this Article
POC accounting methods, explained
You can use a few different methods to calculate POC, although the most commonly used approach is the cost-to-cost method. If you’ve got accurate direct labor hours, you can also use the efforts-expended method to calculate POC, though it is rarely used.
In some rare cases, percentage of completion can be pulled using a units-of-delivery method. This requires you as the contractor to commit to producing and delivering several identical products/services. It’s not something we see often, but it’s good to know this approach exists if you ever find yourself in a similar situation.
If that all sounded like a lot to wrap your head around, don’t worry – we’ll walk through some real-world examples to explain just how these percentage of completion methods work.
How to calculate POC using cost-to-cost
The basic formula to calculate your percentage of completion (using the cost-to-cost process) divides your total cost-to-date by the total estimated project expenses, like this:
Cost-to-Date / Total Project Costs = POC
For instance, if you’ve got $50,000 in current expenses on a project you’ve estimated at $250,000 total, the percentage of completion calculation would be:
$50,000 cost-to-date / $250,000 cost-to-completion = .20, or 20%
This example brings you to a 20% percentage of completion. Once you’ve got your POC, you can then use this percentage to calculate the amount of revenue to recognize for a given payment period or milestone.
Let’s assume your total project price is $300,000. With 20% POC, the revenue recognized for this period ends up being $60,000 based on this formula:
$300,000 contract price x 20% POC = $60,000 recognized revenue
How to calculate POC using the efforts-expended method
Now, POC can also be calculated using your direct labor hours through the efforts-expended method. This formula looks like this:
Labor Hours To-Date / Total Estimated Labor Hours = POC
So, for example, a job with 2,000 current labor hours on a project estimated to require a total of 10,000 hours would result in a POC of 20%, based on the formula:
2,000 labor-to-date / 10,000 total project labor = .20, or 20%
Calculating POC by units-of-delivery
In those uncommon instances where your contract might ask you to deliver several similar products or services, you can use the units-of-delivery method to find your POC. It’s another straightforward formula – one that asks you to divide the units delivered to-date by the total units defined in the contract:
Units Delivered To-Date / Total Contracted Units = POC
Whatever method you use to calculate POC, the key here is being consistent. This way, you’ll ensure you’re accurately recognizing and reporting POC revenue.
The importance of accurate POC reporting
Like we touched on before, accurately reporting your POC plays a vital part in making sure you take home the maximum profit possible from each job. As you already know, actual project spending doesn’t often match up with cost estimates. Consistently calculating your POC helps you avoid overbilling or underbilling, and allows you to make revisions on your estimates as needed.
Recognizing revenue with POC
For projects you’re working on in the long-term, the POC method is a helpful way to keep up with your revenue. To do this, you’ll recognize revenue on your balance sheet via work-in-progress (WIP) reports. To get an accurate POC, you’ll not only need revenue data, but a few other numbers as well:
- Cost-to-date – the total amount spent during the current period
- Total estimated cost – AKA cost-to-completion, or the predicted expenses for the entire project
- Contract price – the total amount charged to the project owner
A specialized construction accounting software like CrewCost makes it easy to manage and track this data in real-time.
Staying compliant with accounting standards
Let’s pivot for just a moment and talk about compliance. Learning the basic compliance standards in your industry is crucial, especially when it comes to POC accounting. For instance, the generally accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS) demands the recognition and reporting of revenue for the period in which it was earned.
While POC is one of the best ways to track and measure longer jobs, GAAP no longer allows percentage of completion accounting to be used in its pure form. With the right construction accounting software though, you shouldn’t have a problem. As a part of CrewCost’s platform for example, we include integrated accounting rules along with customizable reporting to help you streamline the POC process, and stay compliant while doing so.
Integrating POC with project management
Time is money, and no one likes having to switch between 5 different softwares just to manage one workflow. That’s exactly why we designed CrewCost – to give contractors a purpose-built platform to support efficient cash flow management and accurate accounting.
With CrewCost’s headache-free platform, you can stay up-to-date on each job and monitor your company’s financial health all in one place with features like:
- Real-time project dashboards
- Accurate POC calculations
- Customizeable reporting
- Easy invoicing and billing
Sound like what you’ve been looking for? Sign up to try CrewCost free during early access.
Frequently Asked Questions
What is POC accounting in construction?
- POC (percentage of completion) accounting is an accounting method used in the construction industry to recognize revenues and expenses over the course of a long-term construction project. It allows builders to account for construction projects based on the amount of work completed, rather than waiting until the entire project is finished.
How does POC accounting differ from traditional accounting methods?
- Traditional accounting methods, like cash basis or completed contract, recognize revenues and expenses only when payment is exchanged. POC accounting spreads out revenues, expenses, and profit across the lifespan of the project based on the completed percentage, providing a more accurate picture of financial performance.
What are the common methods to calculate POC in accounting?
- Three common methods to calculate percentage of completion are:
- Cost-to-cost method – percentage of total costs incurred to estimated total costs
- Efforts-expended method – labor hours spent compared to budgeted hours
- Units of delivery – milestone unit completions, such as floor levels
Can POC accounting help in accurate revenue recognition?
- Yes, POC accounting allows for revenue recognition throughout a construction project and avoids unbalanced revenue reports at project completion. This matches revenues with project progress to provide useful financial information for management.
Why is accurate POC reporting crucial in construction accounting?
- Accurate POC reporting is crucial for properly allocating revenues, direct expenses, and gross profit over time. Incorrect POC estimates can lead to understated or overstated revenue figures in financial statements. Also, lenders often require POC reporting.
How does POC accounting align with accounting standards like GAAP and IFRS?
- POC accounting helps construction firms using GAAP or IFRS principles comply with revenue recognition rules. Under GAAP, firms must estimate project progress reliably to recognize revenues over time. Similarly, IFRS requires POC accounting in most cases to reflect financial performance.