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By Katie Chrisman / January 12, 2026
3758

Understanding the Percentage-of-Completion Method in Construction Accounting

Construction projects rarely begin and end within the same accounting period. Work may stretch across months or even years, and costs often do not align neatly with billing or cash receipts. These realities make revenue recognition one of the most important financial decisions a construction company must address. The percentage-of-completion method is widely used …

For contractors of all sizes, understanding how this method works can improve project planning, financial forecasting, and long-term decision making.

What the Percentage-of-Completion Method Measures

The percentage-of-completion method recognizes revenue and expenses based on the portion of work completed during a specific period. Instead of waiting until a project is finished, income and costs are recorded steadily over time.

This method benefits contractors because it:

Aligns revenue with the work performed

Reduces large swings in income across reporting periods

Provides more accurate financial information for lenders and bonding agents

For businesses managing active project pipelines, this steady recognition helps create a more predictable financial picture.

How Completion Percentage Is Calculated

There are multiple ways to measure progress, but many contractors use the cost-to-cost approach. This compares actual costs incurred to the project’s total estimated costs.

For example, if a project is expected to cost 1 million dollars and your team has incurred 400,000 dollars to date, the project is considered 40 percent complete. Forty percent of the contract revenue would then be recognized in the financial statements.

While straightforward, this approach depends heavily on accurate job costing and consistent cost tracking.

Why Job Costing Matters

The percentage-of-completion method is only as reliable as the information that supports it. If labor, materials, equipment, or subcontractor costs are not recorded accurately and timely, the calculated percentage of completion may not reflect the true status of the project.

Reliable job costing helps contractors:

Identify issues early, such as overruns or delays

Adjust projections based on real-time information

Communicate clearly with lenders, bonding agents, and project partners

Job costing becomes a foundation for both accurate reporting and better operational decisions.

How This Method Supports Long-Term Planning

One of the strengths of the percentage-of-completion method is that it highlights trends. Contractors can see how costs and revenue evolve as the project progresses instead of waiting for the final outcome. This helps owners plan cash flow, adjust staffing, and anticipate material needs with greater confidence.

It can also reveal whether estimates need to be updated. If costs begin to rise faster than expected, issues can be addressed before they impact the final margins.

Tax Implications for Contractors

Some contractors are required to use the percentage-of-completion method for tax reporting, particularly for larger or long-term projects. Others may have the option to choose among different accounting methods depending on their business size and project mix.

Understanding these rules is important because the method used for tax purposes affects when income is recognized and how taxable profit is calculated.

A review of your accounting method helps confirm that you are meeting requirements while managing tax liability effectively.

Challenges Contractors Should Be Aware Of

While the percentage-of-completion method provides valuable insight, it also demands discipline. Potential challenges include:

Difficulties estimating total project costs early on

Delays in recording job costs or change orders

Overbilling or underbilling that may distort reported results

Project delays that require adjustments to cost forecasts

These issues highlight the importance of clear processes, consistent reporting, and strong internal communication.

Creating Clarity in Construction Accounting

The percentage-of-completion method allows contractors to track performance with greater accuracy and transparency. When supported by reliable job costing and thoughtful project management, it becomes a powerful tool for financial decision making.

At DBC, we help construction companies evaluate their accounting methods, strengthen job costing systems, and build financial processes that support long-term growth. If you would like guidance on implementing or improving the percentage-of-completion method, our team is ready to help.

By Katie Chrisman / January 12, 2026
949

Tax Strategies for Construction Contractors

Tax planning plays a critical role in the financial health of any construction business. Contractors face unique challenges, from long project timelines to fluctuating material costs and changing labor needs. These variables create a tax landscape that looks very different from traditional service industries. With thoughtful planning and clear financial processes, contractors can reduce tax liability, …

Effective tax strategy is not simply about minimizing taxes. It is about creating a financial structure that supports predictable growth, clearer decision making, and stronger project performance.

Understand Your Accounting Method

A contractor’s tax position begins with the accounting method they use. Many contractors underestimate how much this decision affects taxable income, cash flow, and financial reporting. The right method depends on the size of the business, project length, and how revenue is earned.

Contractors commonly use one of the following methods:

Cash method, which recognizes revenue when received and expenses when paid.

Accrual method, which records revenue when earned and expenses when incurred.

Percentage-of-completion method, which recognizes income based on project progress.

Completed contract method, which recognizes income only when a project is finished.

Choosing the method that aligns with your project mix and financial goals can significantly influence your tax liability.

Use Job Costing to Your Advantage

Accurate job costing is essential for both project profitability and tax planning. When material, labor, equipment, and subcontractor costs are tracked consistently, contractors gain a clearer view of which expenses can be deducted and which must be capitalized.

Better job costing also improves forecasting. When the true cost of a job becomes clearer, contractors can plan ahead for tax obligations tied to project timing and revenue recognition.

Take Advantage of Depreciation Opportunities

Construction companies invest heavily in vehicles, tools, heavy equipment, and technology. Many of these purchases qualify for accelerated depreciation. Year-end planning often provides opportunities to:

Review equipment needs for upcoming projects

Identify assets that may qualify for Section 179 or bonus depreciation

Determine whether purchasing or leasing is the more tax-efficient option

These decisions can reduce taxable income in the current year and support operational needs.

Review Your Structure for Tax Efficiency

The business entity you choose influences how income flows, how taxes are calculated, and how future growth is managed. Sole proprietorships, partnerships, LLCs, and S corporations all carry different tax implications.

Contractors often review their structure when they begin hiring more employees, taking on larger projects, or planning for succession. A periodic evaluation helps ensure the business remains aligned with long-term goals.

Plan for Subcontractor Compliance

Subcontractor relationships are central to construction work. They also bring tax responsibilities that require careful oversight. Contractors should confirm that subcontractors:

Provide accurate W-9 forms

Are classified correctly as contractors rather than employees

Receive timely 1099 filings when required

Accurate documentation protects your business and reduces the risk of penalties.

Analyze Project Timing for Tax Impact

Project timing influences when revenue and expenses appear on a tax return. Contractors who understand how timing affects the bottom line can make informed decisions about when to start certain phases, purchase materials, or schedule labor.

Strategic timing can improve cash flow, reduce taxable income, and support a more predictable financial year.

Stay Current on Credits and Incentives

Construction companies may qualify for a variety of federal or state incentives. These can apply to energy-efficient building, equipment purchases, or hiring in certain categories. While these opportunities vary, a yearly review helps ensure nothing is overlooked.

Build a Year-Round Tax Plan

The most effective tax strategies come from consistent, year-round planning rather than last-minute decisions. Contractors benefit from reviewing job performance, project backlog, cash flow patterns, equipment needs, and financial forecasts throughout the year. This proactive approach supports both compliance and long-term growth.

At DBC, we help construction companies build tax strategies that reflect their operational reality. Our team works closely with contractors to strengthen financial processes, review tax opportunities, and create systems that support clear decision making.

If you would like to discuss your tax strategy or explore ways to improve your financial planning, we are here to help.

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