Revenue recognition is an accounting practice that outlines how and when to record income from the sale of goods or services. In the construction industry, there are two methods for recognizing revenue—the completed contract method and the percentage of completion method.
Under the completed contract method, no revenue is recognized until the customer receives all deliverables specified in the contract. This approach is best suited for projects with lumpsum payments at completion.
With the percentage of completion method, revenue is recognized over time according to the progress of the work at hand. With this approach, estimated costs and billings are recorded throughout the project’s life cycle. Upon completion of the project, any differences between the original estimates and actual costs can be addressed in either the profit or loss statement.