Construction Contract Accounting: Percentage of Completion (POC) and Extracts (IFRS 15 Standard)
Construction Contract Accounting: Percentage of Completion (POC) and Progress Billings (IFRS 15)
Percentage of Completion (POC): How to recognize revenue in construction according to IFRS 15, and the treatment of progress billings and work in progress, with examples of entries and steps to calculate and periodically update the percentage of completion—Digital Salla.
- Practical understanding of the meaning of Percentage of Completion and when to use it according to IFRS 15.
- Step-by-step calculation of POC (Cost-to-Cost) with numbers + a two-month example illustrating the impact of EAC adjustment.
- Clear distinction between recognized revenue and progress billings and the resulting: contract asset/liability.
- Simplified accounting entries + a monthly Checklist to reduce errors in Work in Progress (WIP).
1) What is Percentage of Completion (POC) in Construction Accounting?
Percentage of Completion is a method of measuring progress in the execution of a construction contract and subsequently recognizing revenue gradually to reflect actual performance, rather than recognizing revenue all at once upon final delivery. The idea is simple: as long as the client derives benefit from the work “during execution,” it is logical for this to appear in the financial statements in stages.
- Percentage of Completion = Method of measuring progress → Determines recognized revenue.
- Progress Billing = What has been approved/invoiced to the client (Billings) → Determines receivables and collection.
- Execution may lead billings (Contract Asset) or billings may lead execution (Contract Liability).
2) Why is IFRS 15 important in construction contracts?
Standard IFRS 15 provides a clear framework for how to determine the transaction price, identify performance obligations, and then recognize revenue upon satisfaction of those obligations. In construction, satisfaction is often over time because the work creates or enhances an asset that the client controls gradually.
When do we recognize revenue over time?
Practically, in many construction contracts, the “over time” condition is met when:
- The client derives the benefit of the performance during execution (e.g., continuous maintenance/service).
- The contractor creates an asset that the client controls as it is being created (e.g., a building on the client’s land).
- The contractor cannot easily redirect the asset to another party and has an enforceable right to payment for performance to date.
3) Progress Measurement Methods: Input vs Output
When recognizing revenue over time, you need to measure “how much have we accomplished?”. There are two common approaches:
| Approach | How does it measure progress? | When is it suitable? | Important Warning |
|---|---|---|---|
| Input Method (e.g., Cost-to-Cost) | Based on costs incurred compared to total expected cost. | When costs are a good indicator of performance and there is strong control over WIP. | Exclude costs that do not represent progress (waste/uninstalled materials). |
| Output Method (e.g., units/approved stages) | Based on measurable outputs (stages, units, engineering certification percentages). | When there is an objective measurement of outputs (completion certificates/delivered units). | Ensure outputs reflect performance, not just invoicing. |
4) Step-by-Step POC Calculation (Cost-to-Cost)
The most common method for recognizing revenue in construction is the Cost-to-Cost method because it links performance to actual costs, provided there is a good control system that prevents cost inflation or entering expenses unrelated to the contract.
- POC = Costs to date ÷ EAC (Total Estimated Cost at Completion).
- Cumulative Revenue = POC × Contract Value.
- Period Revenue = Current Cumulative Revenue − Previous Cumulative Revenue.
| Contract Price | 1,000,000 |
|---|---|
| Total Estimated Cost (EAC) | 800,000 |
| Costs Incurred to Date | 320,000 |
| Percentage of Completion (POC) | 40% |
| Cumulative Revenue | 400,000 |
| Cumulative Profit | 80,000 |
5) Updating Estimates (EAC) and its Impact on Revenue and Profit
In construction, estimates shift: material prices, labor productivity, design changes… therefore, EAC must be updated periodically. The update doesn’t just change “the truth,” it may change period revenue and profit even if sales (billings) remain fixed.
| Item | End of Month 1 | End of Month 2 |
|---|---|---|
| Costs Incurred to Date | 320,000 | 440,000 |
| EAC (Total Estimated Cost) | 800,000 | 850,000 |
| POC | 40.00% | 51.76% |
| Cumulative Revenue | 400,000 | 517,647 |
| Period Revenue | 400,000 | 117,647 |
| Period Cost | 320,000 | 120,000 |
| Period Profit/Loss | 80,000 | (2,353) |
6) Progress Billings and the Difference Between “Invoiced” and “Recognized”
A Progress Billing is a “statement of work” that is approved (usually by a consultant/engineer) and becomes the basis for invoicing and collection. But it is not always equal to the recognized revenue under IFRS 15.
| Description | End of Month 1 | End of Month 2 |
|---|---|---|
| Recognized Cumulative Revenue | 400,000 | 517,647 |
| Cumulative Billings/Invoiced Amounts | 350,000 | 550,000 |
| Contract Status (Revenue − Billings) | +50,000 | (32,353) |
- +50,000 = Recognized revenue is greater than billings ⇒ Contract Asset (Under-billing).
- (32,353) = Billings are greater than recognized revenue ⇒ Contract Liability (Over-billing).
Controlling WIP starts from controlling costs (materials/labor/subcontractor). You might also like: Construction Costs
7) Work in Progress (WIP) in Financial Presentation: Contract Asset or Contract Liability?
The term Work in Progress (WIP) is used practically in construction companies to denote the “contract status” before completion. In IFRS 15 language, we mostly speak of: Contract Asset or Contract Liability — and they are presented net for each contract.
Claims & Variations Tracker - Excel Template
Practical widespread formula for calculating WIP (for management tracking)
WIP (Management) = Incurred Costs + Recognized Profit − Billings
If the result is positive → Execution leads invoicing (Contract Asset/Current Assets). If the result is negative → Invoicing leads execution (Contract Liability/Current Liabilities).
8) Basic Accounting Entries (Brief and Clear)
Entries differ according to the chart of accounts design and tracking system, but this is a simplified model to help you understand. We will assume the existence of two tracking accounts: eligible contract costs (Asset) and receivables/billings.
8.1 Upon Charging Costs to the Project
| Account | Debit | Credit |
|---|---|---|
| Eligible Contract Costs (WIP / Contract costs) | XXX | — |
| Cash / Suppliers / Wages Payable | — | XXX |
8.2 Upon Issuance/Approval of Progress Billing (Invoicing)
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable — Progress Billings | XXX | — |
| Contract Liability — Billings | — | XXX |
8.3 Upon Revenue Recognition According to POC
| Account | Debit | Credit |
|---|---|---|
| Contract Asset (or Reduction of Contract Liability) | XXX | — |
| Construction Contract Revenue | — | XXX |
8.4 Upon Converting Period Costs to Cost of Sales (by the recognized revenue)
| Account | Debit | Credit |
|---|---|---|
| Cost of Construction | XXX | — |
| Eligible Contract Costs (WIP) | — | XXX |
9) Special Cases to Watch for in Construction Projects
9.1 Variation Orders, Claims, and Incentives
These items are often “variable consideration”. Practically: do not include them fully in revenue unless it is probable that a significant reversal will not occur later, with documentation of approvals and collection probability, updating estimates monthly.
9.2 Retentions and Letters of Guarantee
Many contracts deduct a percentage (Retention) from the progress billing to be paid later upon preliminary/final handover. Accountingly, they may be “receivables” if they become unconditional, or a “contract asset” if linked to performance/acceptance conditions.
9.3 Onerous Contracts
If expected cost exceeds revenue (or transaction price), the issue is not just POC: an expected loss and an appropriate provision must be recognized according to onerous contract requirements (usually via IAS 37), with disclosure.
10) Monthly Checklist for Adjusting POC and Progress Billings
This is a short list helping the project/finance team reduce repetitive errors in WIP:
| Step | What to do? | Document/Evidence |
|---|---|---|
| 1 | Update actual costs by cost item and project | Purchase documents/Subcontractor/Wages |
| 2 | Update EAC (in cooperation with project management) | Remaining cost estimate report + Reasons for change |
| 3 | Calculate POC, cumulative revenue, then period revenue | POC Worksheet (Cost-to-cost) |
| 4 | Reconcile approved billings, collection, and retention | Approval certificates + Client account statement |
| 5 | Identify contract asset/liability net for each project | WIP Table by project |
| 6 | Review changes/claims and enter only what is supported | Approved variation orders/Official letters |
11) Ready-made Tools and Templates for Applying POC and WIP File
If you want a quick application without building files from scratch, these resources are directly linked to the article (templates + policies + chart of accounts):
Construction Accounting and Project Management System (Projects Finance & WIP) – Excel File
The construction accounting WIP bundle links project costs with WIP, POC, progress billings, and retentions. It produces monthly project profitability, under/over billing, and variance reports for a finance manager or project accountant tracking construction contracts.
Specialized Sector Chart of Accounts Library (Sector COA Library) – Ready-made Excel Files
Ready-made chart of accounts by activity providing COA for trade, services, construction, and manufacturing with clear levels and classifications ready for migration. It produces an account structure that reduces reclassification in closing, for a finance manager establishing an accounting system or restructuring an existing COA.
Work in Progress and POC Template (Project WIP & % Completion) – Excel Template
Project WIP measures work in progress and the POC percentage via actual cost and EAC update, linking them to earned revenue. It produces under/over billing and monthly project profitability for a project accountant or finance manager in long-term construction and services.
Project Revenue Recognition Policy according to POC (POC & IFRS 15 Policy) – Editable Word File
POC documents the policy for measuring progress and updating EAC and linking them to earned revenue according to IFRS 15, including the treatment of claims and under/over billing. It produces unified application rules for project closing, for report and audit teams when preparing monthly and annual statements.
12) Frequently Asked Questions
What is meant by Percentage of Completion (POC) in construction?
It is a method of measuring progress in contract performance and recognizing revenue gradually to reflect actual performance, rather than recognizing revenue all at once upon final delivery.
Is Percentage of Completion the same as a progress billing?
No. POC measures progress (and recognized revenue) according to a measurement methodology, while a progress billing represents what has been approved/invoiced to the client.
How do I calculate the percentage of completion using the Cost-to-Cost method?
POC = Costs incurred to date ÷ Total estimated cost at completion (EAC). Then cumulative revenue = POC × Contract value.
When does a contract asset or contract liability appear?
If recognized revenue is greater than billings, you have a Contract Asset. If billings are greater than recognized revenue, you have a Contract Liability.
How do I handle variation orders and claims?
They are treated as part of the transaction price if a significant revenue reversal is improbable, with documentation and periodic estimate updates.
What if the project becomes loss-making (estimated cost higher than revenue)?
Estimates must be updated immediately and the expected loss recognized according to onerous contract requirements (usually via IAS 37).
13) Conclusion
The essence of Percentage of Completion is transforming execution reality into disciplined figures: Actual Cost + EAC Estimate ⇒ Progress Measurement ⇒ Recognized Revenue, then comparing that with Progress Billings to determine the contract asset/liability. When you adjust this cycle, a construction company’s statements become more stable, and tracking profitability and liquidity for each project becomes much clearer.