Unlock the Potential of Larger Projects with Percentage of Completion Accounting. Ensure Financial Transparency, Gain Surety Trust, and Secure Long-term Success.
When you first launched your construction company, managing the books was relatively straightforward. You probably started with a cash basis accounting system, then quickly switched to the accrual methodology. Both methods have their place in startup businesses with short-term projects.
Now you’re ready for larger, longer, and more complex projects – jobs that require financial statements to secure bonding. Now it’s time for your company to graduate to Percentage of Completion accounting. All surety companies require that a contractor’s financial statement be prepared using PoC.
Basics of the PoC Method
The PoC method enables companies to recognize revenue from long-term contracts before project completion by calculating the percentage of the contract completed within a specific period. This approach is particularly useful for construction companies, as their revenue primarily comes from projects spanning months or years. By using the PoC method, these companies ensure their financial statements accurately reflect revenues and expenses during the project’s duration.
Surety companies mandate that contractors’ financial statements be prepared using the Percentage of Completion method. This accounting approach recognizes revenue and costs throughout the life of each contract, providing the surety company with an accurate view of the contractor’s financial status.
Additionally, PoC accounting on year-end and interim financial statements allows sureties to review a contractor’s sales, gross profits, receivables, underbillings, payables, and overbillings for each project accurately. For companies reliant on surety bonding, it is crucial to obtain review or audit quality statements using PoC accounting, including detailed work schedules and cost breakdowns.
Additional Advantages of PoC
- PoC addresses project-related expenses alongside revenue. It records the percentage of expenses incurred during the relevant period, unlike the completed-contract method, which defers all expenses until project completion. This allows for a real-time view of project costs.
- PoC helps in more precise quarterly tax assessments. While methods like the completed-contract defer tax liabilities until project completion, PoC spreads the tax burden evenly, avoiding a lump-sum tax payment.
Challenges of PoC Accounting
For PoC to be effective, a company must be able to accurately estimate project revenues, costs, and timelines. Businesses that experience significant fluctuations in material costs or frequent project delays will find the PoC method challenging.
Moreover, for PoC revenue estimates to be reliable, there must be a reasonable assurance that receivables will be collected as per the contract schedule. If a company spends months or years recognizing incremental revenue only to later reclassify it as bad debt after the project’s completion, it can complicate the accounting process.
Implementing PoC
To implement the Percentage of Completion method in your company, start by collaborating with a CPA who specializes in construction accounting and is well-versed in PoC. A construction-focused CPA understands the industry’s nuances and the specific requirements of sureties and banks. Together, you’ll need to address several key questions to determine if PoC is suitable for your business:
Do I earn significant revenue from contracts that span multiple accounting periods?
Are disputed contracts rare, or do they occur somewhat frequently?
Can I accurately estimate the parameters of each long-term project?
Is it better to defer all expenses and revenue until the contract ends, or to record a portion of them more frequently?
After confirming that PoC is a good fit, it’s time to develop an implementation plan. Standardize your methods for calculating revenue and expenses across all projects. Decide how you will verify the expenditures incurred during the various periods for which you will recognize revenue and expenses. Ensure your accounts receivable team is prepared to invoice quickly and accurately, and to collect payments promptly upon project completion.
POC: A Strategic Move for Long-term Success
Transitioning to the Percentage of Completion accounting method marks a significant milestone for your contracting company. As you embark on larger, more complex projects, PoC accounting will provide the financial transparency required by surety companies and banks, ensuring your financial statements reflect the true progress and financial health of your long-term contracts.
But adopting PoC is not just a compliance measure; it’s a strategic move that secures the trust of sureties and financial institutions. With careful planning and expert guidance from your CPA, your company will be well-equipped to handle the complexities of long-term contracts, paving the way for sustained growth and profitability.
For decades, PriceKubecka has provided innovative advisory services tailored to the unique needs of construction companies. Whether you require financial statements, tax strategies, or generalized accounting guidance, our construction-savvy CPAs can help you meet your financial and operational goals. CONTACT US to schedule a consultation and learn how we can support your construction business’s fiscal success.