Percentage Completion (POC) Method

See Also:
Percentage Completion Method Example
Accounting Principles
Point of Sale Method (POS)
Installment Method
Completed Contract Method
Collection Method
Work Breakdown Structure (WBS)

Percentage Completion (POC) Method

Use the Percentage Completion (POC) method with construction based projects that extend over the course of several years. Furthermore, many accountants prefer the percentage completion accounting over the Completed Contract Method. It also paints a more realistic view of the company. Because the projects are usually long term lasting several years, it estimates completion for the company. So it shows revenues year by year than to just all of the sudden have one large inflow at the end where the project was completed.


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Percentage Completion (POC) Method Formula

The Percentage of completion formula is very simple. First, take an estimated percentage of how close the project is to being completed by taking the cost to date for the project over the total estimated cost. Then multiply the percentage calculated by the total project revenue to compute revenue for the period. Then derive the construction income by subtracting the cost from the period revenue.

Use the following simplified equations for the percentage completion formula and other associated formulas:

Period Costs (annual , quarterly, etc.)/ Total Estimated Cost = Percentage Completed

Percentage Completed * Total Project Revenue = Period Revenue

Period Revenue – Period Costs = Project Income

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Percentage Completion (POC) Method

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9 Responses to Percentage Completion (POC) Method

  1. Anonymous June 6, 2017 at 4:27 am #

    Hi,
    I have the question regarding POC method. Would it be possible that cost will be higher that revenue at some point of time?

    • Ganesh V August 22, 2017 at 12:41 am #

      Hi

      There is a possibility, Assume that the project period is for 1 yr and 6 months down the line you as a PM figure out that the project is not going in the right direction. You then decide to add more resources, crash the project and make it work.

      In such a scenario, there is a high probability that the end date would not be met even with the extended team. The costs would have increased by a fair amount and by the time the project draws to a close, the cost put in might have overshot the revenue.

      All these are negative margin projects and happen if either the team is not up to the mark or the requirements keep changing and for relationship purposes, the sales team takes all of these with no extra revenue

      Ganesh V

  2. Karen August 3, 2017 at 3:22 pm #

    I have a question. Can the POC method be applied to each major section of a contract or does it have to be total costs to date compared to total projected costs?

    • Ganesh V August 22, 2017 at 12:44 am #

      Hi

      Though the POC method is typically on costs, this can be slightly modified to calculate on effort. I have seen quite a few organizations use effort based POC model to look at possible revenue leakages / shift in milestones.

      In such a scenario, anyone can put a trend month wise or fortnightly (which can map to a phase or release)

      Ganesh V

  3. Pradeep November 16, 2017 at 12:23 am #

    My question is If I have Oder for 100 rs But i have complete only 50 Rs.
    Then Reaming 50 RS would be treat as BAD ORDER Value ?

    Pradeep

  4. Douglas Burkhart April 7, 2018 at 11:47 pm #

    I have a question on what to show in the “Billings to date column” of the POC spreadsheet. We are contractors and invoice our customer monthly progress billings. Our customers typically withhold 10% of our progress billing for “retention” which we will not be paid until the contract is finished. Our construction projects typically last two or
    three years and retention is not paid until the job is completely finished. Is in correct on the POC spreadsheet “Billings to date column” to show the net we have invoiced including retention earned but not received or just the net amount of what we will be paid on the progress billing not including the retention?

  5. Prakash July 13, 2018 at 10:17 pm #

    Hi, billings to date should be gross progress billing (including retention) . Retention forms part of AR sales.

  6. Kalyan Emandi December 13, 2018 at 5:28 am #

    HI,

    Just wondering. We have several componenets of the project.

    Procurement, engineering and construction . Once it is delivered. the project is ciomplete.

    Project is both cost and duration.

    So I have planned Schedule and a planned cost.

    How do I arrive at project percentage with Cost and schedule.

  7. nie December 17, 2018 at 1:23 am #

    Hi,

    How is the treatment for borrowing costs? Assume this borrowing cost is direct cost to the project, the double entry: Dr Construction cost (Interest exp), Cr Bank. Should this borrowing costs include to calculate the percentage of completion method?

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