Andy Pena takes a look at this method of recording long-term contracts:
In order to comply with generally accepted accounting principles (GAAP), your construction company’s financial statements are required to recognize revenue a certain way. GAAP requires revenue to be recorded in the period it is earned, regardless of when it is billed or when cash is received. The best way to comply with this revenue recognition under a fixed price construction contract is by using the percentage-of-completion (POC) method.
The POC method involves the ongoing recognition of revenue related to long-term projects. This can help you recognize revenue on projects in any given month, quarter, or year-end. It works best if you can make a reasonable estimate at every stage of the project. This will assist management in knowing how much of the job remains to be completed, as well as providing the company with profitability benchmarks. The POC method can also give you a building block for future jobs on which you will be bidding.
All in all, the POC method is a very valuable tool for contractors to track their progress of long-term projects.