Long-term projects present a unique financial puzzle. You’re spending money for months, or even years, before the final payment comes through. How does that affect your cash flow and tax strategy? The Completed Contract Method (CCM) directly addresses this by letting you defer recognizing revenue—and the associated profit—until the job is done. This can be a powerful tool for managing cash and delaying tax payments. But it also creates lumpy financial reports and requires careful planning. We’ll explore these financial implications in detail and use a practical completed contract method example to show you how CCM impacts your balance sheet, income statement, and bottom line.

Key Takeaways

• Use CCM for projects with unpredictable outcomes: This method is best for short-term contracts or when you can't reliably estimate costs and progress, ensuring you only recognize revenue when the final result is certain.
• Keep your income statement clean until completion: Under CCM, all project costs and client payments are recorded on the balance sheet. The full financial impact—revenue, expenses, and profit—hits your income statement in a single period once the project is delivered.
• Master your internal project management: Because you defer revenue recognition, you must have strict internal controls. Meticulously track costs, monitor progress against your budget, and manage cash flow to avoid discovering a loss only after the project is finished.

What Is the Completed Contract Method?

The Completed Contract Method (CCM) is an approach to revenue recognition for long-term projects where you hold off on recording income and expenses until the job is completely finished. Think of it as waiting to count your earnings until the final deliverable is in the client's hands. This method simplifies the accounting process for certain types of contracts, but it’s crucial to understand when and how to apply it to maintain a clear financial picture and stay compliant. Let's break down the key principles and when this method makes the most sense for your business.

The Core Principles

At its heart, the Completed Contract Method is straightforward: you defer all revenue and project-related costs until the contract is 100% complete. While the project is underway, you’ll track all your expenses and any client payments on your balance sheet, but none of it will appear on your income statement. Once the project is delivered and the client signs off, you recognize all the accumulated revenue and expenses in one go. This gives you a single, clear snapshot of the project's total profitability within one accounting period, rather than showing partial results over time.

When Should You Use CCM?

CCM isn’t a one-size-fits-all solution. It’s best suited for short-term contracts, especially those that start and finish within the same fiscal year. It's also a practical choice when a project is filled with major uncertainties. If you can't reliably estimate the total costs or measure your progress toward completion, CCM is a safer bet than guessing. This method helps you maintain ASC 606 compliance when other revenue recognition models are too risky. For instance, if a project is subject to unpredictable delays or hinges on a single, critical deliverable, CCM prevents you from recognizing revenue before the work is truly done.

Which Industries Use CCM?

You’ll most often see the Completed Contract Method in project-based industries where work can span a significant amount of time. Construction is the classic example—think of building a custom home or a commercial office space. Real estate development, aerospace, and certain large-scale engineering projects also frequently use this method. For these businesses, a project isn't truly "done" until the keys are handed over or the final product is delivered. Using CCM aligns their financial reporting with these major project milestones. Having the right system integrations in place can make tracking the costs for these long-term projects much more manageable.

How Does Revenue Recognition Work Under CCM?

The Completed Contract Method is a straightforward but patient approach to accounting for long-term projects. Think of it as a "wait-and-see" model. Instead of recognizing revenue and costs gradually over the life of a project, you hold off on recording anything on your income statement until the project is completely finished and delivered to the client. This method simplifies the accounting process during the project but concentrates all the financial impact into a single accounting period.

During the project, all your financial activity is tracked on the balance sheet. You’ll accumulate costs in an asset account and record any payments from the client as a liability. It’s only when you hand over the final product that the magic happens on your income statement. At that moment, you recognize the total contract revenue and all the accumulated costs at once, revealing the project's total profit or loss. This approach is especially useful for shorter long-term projects or when the final outcome is too uncertain to estimate progress accurately. For businesses dealing with high volumes of these contracts, using a system for automated revenue recognition is key to keeping everything organized and compliant.

Recording Your Project Costs

With the Completed Contract Method, you treat project costs differently than you would for day-to-day operations. As you spend money on labor, materials, and other direct project expenses, you don't immediately record them as expenses on your income statement. Instead, these costs are gathered in an asset account on your balance sheet, often called "Construction in Progress" or a similar title.

This account grows as you invest more into the project. It essentially represents the value of the unfinished work. By keeping these costs on the balance sheet, you avoid impacting your profitability metrics while the project is still underway. Only when the contract is fulfilled do you move the total accumulated cost from the balance sheet to the income statement as the "Cost of Goods Sold" or a similar expense line item.

Managing Payments Before Completion

What happens when a client pays you an installment or an upfront deposit before the project is finished? Under CCM, that cash isn't considered revenue yet. Because you haven't delivered the final product, you haven't technically "earned" it. Instead, you record these payments as a liability on your balance sheet.

This liability account is typically called "Billings on Uncompleted Contracts." It reflects your obligation to the client to either complete the work or return the money. Each time you receive a payment, this liability account increases. This gives a clear picture to anyone reading your financial statements that while you have the cash, you also have a corresponding duty to perform. Once the project is complete, this liability is cleared when you finally recognize the revenue.

Recognizing Revenue at the Finish Line

This is the moment everything comes together under CCM. Once the project is 100% complete and your client has accepted the work, you can finally recognize the revenue. On this date, you make a single, comprehensive entry on your income statement. The total agreed-upon contract price is recorded as revenue.

At the same time, you’ll move all the project costs you've been accumulating on your balance sheet over to the income statement as expenses. The difference between the total revenue and total expenses gives you the gross profit for the entire project, all recognized in one accounting period. This provides a very clear, final profitability figure for the job, which is one of the main appeals of the CCM approach. For more details on financial reporting, you can find helpful insights on the HubiFi blog.

How CCM Affects Your Balance Sheet

Throughout a project's lifecycle, CCM makes your balance sheet do all the heavy lifting. While the project is active, your income statement remains unaffected. Instead, your balance sheet will show a growing asset ("Construction in Progress") and potentially a growing liability ("Billings on Uncompleted Contracts") as you incur costs and receive payments.

The major shift happens upon completion. The asset and liability accounts related to the project are zeroed out, and the full financial impact moves to the income statement. This can cause significant fluctuations in your reported revenue and profit from one period to the next. One quarter might show modest results, while the next could show a massive spike if a large project is completed. This is a critical factor to consider when analyzing financial performance and communicating with stakeholders.

Let's Walk Through a CCM Example

Theory is great, but seeing the numbers in action is what really makes a concept click. Let's use a straightforward scenario to illustrate the completed contract method. Imagine your company, BuildRight Inc., signs a two-year, $2 million contract to construct a small office building. You estimate the total cost to complete the project will be $1.5 million, leaving you with a healthy profit.

With CCM, you won't recognize any of that $2 million in revenue or the $1.5 million in costs until the client has the keys in hand. This approach differs significantly from other methods where you might recognize revenue incrementally. Instead, the financial impact of the entire project hits your books all at once. Let's break down how the accounting works from start to finish.

The Basic Calculation

The core principle of the completed contract method is simple: delay everything. You postpone recognizing both revenue and expenses until the contract is 100% finished. For our BuildRight Inc. example, the income statement will show $0 in revenue and $0 in cost of goods sold from this project in the first year, even if you're halfway through construction and have spent a significant amount of money. The entire financial impact is recorded in a single accounting period at the very end. This approach keeps your income statement clean and prevents fluctuations in reported profit while the project is still in progress.

Tracking Costs Step-by-Step

So, where do all the costs go if not on the income statement? As BuildRight Inc. spends money on labor, materials, and subcontractors, those expenses are recorded on the balance sheet. They accumulate in an asset account, often called "Construction in Progress" (CIP). Let's say you spend $700,000 in Year 1. That $700,000 increases your assets. If you spend another $800,000 in Year 2 to finish the job, your CIP account grows to the total cost of $1.5 million. This account essentially holds all your project-related costs until the job is done, giving a clear picture of your investment without distorting your profitability mid-stream.

The Final Revenue Recognition Step

This is the moment it all comes together. Once the office building is complete and the client officially accepts it, BuildRight Inc. can finally recognize the project on its income statement. You’ll record the full $2 million in revenue and the total $1.5 million in expenses (by moving the balance from the CIP account) all at once. This results in a $500,000 gross profit for the project, all reported in the year of completion. The CIP asset account is zeroed out, and the project's financial story is officially closed, providing a definitive snapshot of its total profitability.

How CCM Impacts Tax Planning

The "all at once" nature of CCM has a major effect on your taxes. By deferring revenue recognition, you also defer the income tax associated with the project's profit. For BuildRight Inc., no reported profit in Year 1 means no tax liability on this project for that year. The entire $500,000 profit is taxed in Year 2. This can be a powerful tool for managing cash flow, especially if a project's outcome isn't certain until the end. It allows you to align your tax payments with when you actually realize the profit from the completed job, a strategy you can explore further in our financial insights blog.

Your Guide to Implementing CCM

Adopting the Completed Contract Method isn't as simple as flipping a switch. It requires a thoughtful approach to your contracts, documentation, and accounting systems to ensure you stay compliant and maintain clear financial visibility. Getting these foundational pieces right from the start will make managing long-term projects much smoother and keep your financial reporting accurate. Think of it as building the scaffolding before you start construction—it’s an essential step for a successful outcome. For more tips on financial operations, you can always find fresh ideas on the HubiFi Blog. Let’s walk through the key steps to get your business set up for CCM.

What Your Contracts Need

The foundation of CCM lies in your contracts. As one expert notes, "The way a contract is written is very important because it helps decide if revenue should be recognized slowly over time or all at once at a single point in time." To properly use CCM, your contracts must clearly define a single, unambiguous point of completion. This means outlining specific deliverables and acceptance criteria that, once met, signify the project is 100% finished. Vague terms or multiple completion phases can complicate things and may even disqualify you from using this method during an audit. Make sure your legal and project teams are aligned on creating contracts that support your accounting method.

Set Your Documentation Standards

With CCM, meticulous record-keeping is non-negotiable. Because "all the money earned and all the costs spent on a project are saved up and reported only when the entire contract is done," you need a rock-solid system for tracking everything. This includes all direct labor, materials, subcontractor fees, and any allocated overhead. Your documentation should be consistent, detailed, and updated regularly. Create a standardized process that your entire team follows for logging expenses and billings. This detailed trail of records is your primary source of truth and will be essential for accurately calculating your final profit and loss when the project concludes.

Stay Compliant with IRS Guidelines

Before you commit to CCM, you need to make sure you’re allowed to use it. "The IRS has rules about when companies can use CCM, including limits on a company's yearly income and how long projects can take." Generally, this method is available for smaller companies or for certain types of short-term contracts, typically those completed within two years. It’s critical to review these regulations and confirm your eligibility. Consulting with a tax professional is always a good idea to ensure you meet all the requirements and avoid any potential compliance issues down the road. Staying on the right side of IRS guidelines is key to using CCM successfully.

Set Up Your Accounting System for CCM

Your accounting system needs to be configured to handle the unique flow of CCM. "Instead of showing income and expenses as work progresses, these amounts are kept on the company's balance sheet... until the project is 100% done." You’ll need to create specific accounts to manage this, such as an asset account like "Construction in Progress" to accumulate costs and a liability account like "Billings on Construction in Progress" to track client payments. Ensuring your systems can handle these deferrals is crucial. With the right integrations, you can automate data collection from your CRM and ERP to make this process seamless and accurate.

CCM vs. Percentage of Completion Method

When your business handles long-term contracts, deciding how to recognize revenue is a major decision. The two primary methods you’ll encounter are the Completed Contract Method (CCM) and the Percentage of Completion (POC) method. While both are valid under specific circumstances, they paint very different pictures of your company's financial health along the way. Think of it as the difference between getting paid for a project in one lump sum at the very end versus receiving payments at several key milestones. Understanding how they work is the first step to choosing the right approach for your projects.

The Key Differences

The biggest difference between CCM and POC comes down to timing. With the Completed Contract Method, you wait to recognize all of a project's revenue and expenses until the contract is 100% complete. Even if you’ve been working and spending for months, nothing hits your income statement until you hand over the final product.

On the other hand, the Percentage of Completion method allows you to recognize revenue and costs incrementally as you work. As you hit certain milestones or complete a certain percentage of the job, you can record a proportional amount of the revenue. This method provides a more consistent, real-time view of your profitability throughout a long project, while CCM saves it all for the big reveal at the end.

Comparing Accounting Treatments

The accounting treatment for these two methods is quite distinct. Under CCM, all project costs are collected in an asset account on your balance sheet, often called "Construction in Progress." Any payments you receive from the client are held in a liability account. Only when the project is officially finished do you move all those accumulated costs and the total revenue to the income statement.

The POC method is more dynamic. In each accounting period, you calculate the percentage of the project that’s complete and recognize that portion of the total estimated revenue and costs. This means your income statement reflects your company’s performance on the project as it happens. This approach requires a reliable system to track project progress and costs accurately throughout the project’s lifecycle.

How to Choose the Right Method

Choosing between CCM and POC depends heavily on how predictable your project is. CCM is best suited for short-term contracts or projects where it’s difficult to reliably estimate progress or costs. If there are significant uncertainties that could derail the project or change the outcome, waiting until the end to recognize revenue is the more conservative and appropriate choice.

The POC method is ideal for long-term projects where you have a solid contract and can confidently measure your progress toward completion. The Generally Accepted Accounting Principles (GAAP) actually prefer the POC method because it provides a more accurate picture of a company's financial performance over time. However, you must have a robust system in place to justify your percentage of completion estimates.

How Each Method Impacts Financials

Your choice of method directly impacts how your financial statements look to investors, lenders, and internal stakeholders. With CCM, your revenue and profits can appear lumpy and inconsistent. You might have several periods of low or no income, followed by a huge spike when a few large projects finish at the same time. This volatility can make it harder to secure loans or attract investors.

In contrast, the POC method smooths out your revenue over the life of a project, presenting a more stable and predictable financial picture. This consistency is often viewed more favorably, as it reflects the company's ongoing operations. While the core CCM principle of waiting for certainty is still relevant under ASC 606 for highly uncertain projects, most businesses benefit from the transparency of the POC method.

How to Manage Long-Term Projects with CCM

Using the Completed Contract Method simplifies your revenue recognition down to a single event, but it doesn't mean you can take a hands-off approach to project management. In fact, because you're deferring all financial results until the very end, strong internal management becomes even more critical. Without it, you could be flying blind, unaware of budget overruns or potential losses until it's too late.

Successfully managing a long-term project under CCM comes down to discipline and visibility. You need a clear plan from the start, tight financial controls to track every dollar, a strategy for handling unexpected issues, and a consistent way to monitor your progress internally. Think of it as building the financial story of your project piece by piece, so that when it's time to recognize the revenue, you have a complete and accurate picture. For more guidance on financial operations, you can find helpful articles on the HubiFi blog. Let's break down the four key pillars of managing your CCM projects effectively.

Plan Your Project Timeline

A detailed project timeline is your internal roadmap. Since CCM is often used for projects where it's hard to reliably estimate progress at any given moment, having a solid internal plan is non-negotiable. This timeline isn't for recognizing revenue in stages, but for managing your resources, setting client expectations, and keeping your team on track.

Start by breaking the project down into distinct phases with clear milestones. This allows you to monitor progress against your own schedule, even if you aren't reporting it externally. A well-defined timeline helps you allocate labor and materials efficiently and provides a framework for communicating updates to your client, ensuring they feel informed and confident throughout the project's lifecycle.

Establish Financial Controls

With CCM, you don't report income or expenses until the contract is finished, but cash is still flowing in and out of your business. This makes strong financial controls essential. You need a bulletproof system for tracking every cost and every payment associated with a specific project. This ensures that when the project is complete, you have all the accurate data needed for the final revenue and profit calculation.

Set up separate project codes or accounts in your accounting system to isolate all related expenses and billings. Meticulously record everything from raw materials and labor to subcontractor fees. Having robust integrations between your project management and accounting software can automate this process, reducing errors and giving you a real-time view of your project's financial status.

Develop Risk Mitigation Strategies

Long-term projects are full of uncertainties. Supply chain disruptions, labor shortages, or unexpected site conditions can cause significant delays and cost overruns. Because CCM is well-suited for projects that might have these kinds of unexpected hurdles, building a risk mitigation plan is a crucial step. It’s your playbook for handling problems before they derail your budget and timeline.

Start by identifying potential risks during the bidding and planning phases. What could go wrong? For each risk, develop a contingency plan. This might involve sourcing backup suppliers, building buffer time into your schedule, or having clear contract clauses that address scope changes and delays. This proactive approach protects your profitability, which you won't officially see until the project is complete.

Monitor Project Performance

Just because you aren't recognizing revenue doesn't mean you can't measure performance. You need to know if a project is on track to be profitable long before it's finished. Remember, if a project results in a loss, that loss is also recorded only when the project is fully completed. Regular internal performance monitoring is your early warning system to prevent this.

Consistently compare your actual costs to your initial budget. Are you overspending on materials? Is labor taking longer than planned? Tracking these variances helps you make timely adjustments. This internal oversight is vital for making smart business decisions and ensuring the final financial outcome holds no surprises. A clear view of your data is key, and a customized demo can show you how to achieve that visibility.

Best Practices for a Smooth CCM Process

The Completed Contract Method might seem simple on the surface—you just recognize revenue at the end, right? But the success of this method hinges on what you do during the project. Without the right processes in place, you can find yourself dealing with inaccurate financials, compliance headaches, and unhappy stakeholders. Think of these best practices as the foundation for a successful project. They ensure that when you finally reach the finish line, your financial reporting is accurate, defensible, and stress-free.

Putting in the work to establish these habits from day one will pay off. You’ll have a clearer picture of your project's financial health, even before you recognize the revenue, and you’ll be able to close the books with confidence. It’s all about creating a system that supports transparency and accuracy from start to finish. This means going beyond basic bookkeeping and building a framework that tracks every detail, keeps everyone informed, and prepares you for scrutiny. By focusing on solid cost tracking, clear communication, audit readiness, and system integration, you transform CCM from a simple accounting rule into a powerful tool for managing long-term projects effectively.

Implement a Solid Cost Tracking System

You can't accurately calculate your profit at the end of a project if you don't have a precise handle on your costs from the beginning. A robust cost tracking system is non-negotiable for CCM. This means capturing every single project-related expense as it happens—from materials and labor to subcontractor fees and allocated overhead. Relying on a messy spreadsheet or shoebox of receipts won't cut it. A dedicated system ensures you have a comprehensive and accurate view of total costs, making the final revenue recognition step a simple calculation rather than a frantic scramble for data. This is a cornerstone of advanced construction accounting.

Keep Stakeholders in the Loop

Just because you’re deferring revenue doesn’t mean you should defer communication. Keeping your stakeholders informed throughout the project is crucial for managing expectations and maintaining trust. Provide regular updates on progress, milestones, and budget adherence. When clients, investors, and internal teams have a clear line of sight into the project's status, it prevents surprises and builds confidence in your management. This kind of transparency is a key part of contract management best practices and ensures everyone is aligned, even when the final numbers aren't on the books yet.

Prepare for Audits with Confidence

When you use CCM, the moment you recognize revenue is a significant financial event that will likely attract an auditor's attention. The best way to handle this is to be prepared from the start. This means maintaining meticulous records for every project. Keep a clean, organized, and accessible file with the original contract, all change orders, vendor invoices, and clear documentation of project completion. Having a clear audit trail makes the process smoother and demonstrates the integrity of your financial reporting. When you can easily produce supporting documents, you can face any contract audit with confidence.

Integrate Your Systems

Running your project management and accounting in separate, disconnected systems is a recipe for errors and inefficiency. Manual data entry between platforms can lead to mistakes that throw off your cost tracking and final profit calculations. By integrating your systems, you create a single source of truth where data flows automatically. This ensures your financial records are always in sync with your project's progress. Having seamless integrations allows for real-time tracking of costs and gives you a much clearer picture of your financial position long before the project is complete.

How to Handle Common CCM Challenges

The Completed Contract Method might seem simple on the surface, but it comes with its own set of hurdles. From volatile financial reports to tricky tax situations, managing CCM effectively requires a proactive approach. The key is to anticipate these challenges and have a solid plan in place to address them. By understanding the potential pitfalls, you can keep your projects on track and your financials in good health. Let's walk through some of the most common issues and how you can handle them.

Simplify Financial Reporting

One of the biggest draws of CCM is its simplicity—you don't recognize revenue until a project is 100% complete. This eliminates the need for complex estimates about future costs and progress. However, this can also make your financial statements look incredibly inconsistent. You might have a quarter with massive revenue followed by a quarter with almost none, which can be alarming for investors or lenders who want to see steady performance.

To counter this, create internal management reports that track project profitability and progress over time. These reports are for your eyes only, but they give you and your team a much more realistic view of the company's financial health. This allows you to make informed decisions without waiting for a project to officially close. It also helps you provide better context to stakeholders who might question your fluctuating public financials.

Manage Your Cash Flow

While you're waiting to recognize revenue at the end of a project, you're still paying for labor, materials, and other expenses along the way. This can create a significant cash flow gap, especially on long-term projects. The lumpy nature of CCM revenue can also make it difficult to secure loans, as lenders may see your income as unpredictable. Without a steady stream of recognized revenue, it’s tough to prove your ability to make regular payments.

The best way to handle this is with diligent cash flow forecasting. Structure your contracts to include upfront deposits or milestone payments to ensure cash is coming in throughout the project lifecycle. Maintaining a healthy cash reserve is also crucial for covering expenses during leaner periods. By planning ahead, you can ensure you have the funds you need to see every project through to completion without a financial crunch.

Address the Tax Implications

A major benefit of CCM is the ability to defer taxes. Since you don't report income until a project is finished, you can delay paying taxes on that profit. This can be a great short-term advantage for your cash flow. However, this strategy comes with a risk. If tax rates increase during the course of a multi-year project, you could end up paying more in taxes than you would have under a different method.

It’s essential to work with a tax advisor who understands the nuances of long-term contract accounting. They can help you model different scenarios and understand the potential impact of changing tax laws on your business. This isn't a "set it and forget it" situation; regular check-ins on your tax strategy can save you from a surprisingly large bill down the road.

Meet Compliance Requirements

Using CCM isn't a free-for-all. Both ASC 606 and the IRS have specific rules about who can use this method, often based on your company's average annual revenue and the expected duration of your projects. The way your contracts are written is also incredibly important, as they must justify why revenue can only be recognized at a single point in time rather than over the project's life.

To stay compliant, make sure your contracts clearly define the project scope, deliverables, and the criteria for final completion. Regularly review IRS guidelines to ensure your business still qualifies for CCM. Using an automated system can help you maintain accurate records and ensure your revenue recognition process aligns with current standards, giving you peace of mind during an audit.

Related Articles

• Master Revenue Recognition in Construction Industry - HubiFi
• Percentage Completion Accounting: Your Essential Guide - HubiFi
• How to Master Percentage of Completion Revenue Recognition - HubiFi

Frequently Asked Questions

What's the biggest risk of using the Completed Contract Method? The biggest risk is a lack of visibility into a project's profitability until it's too late. Because you don't recognize profit or loss until the very end, a project could be running significantly over budget for months without it showing up on your income statement. This can create a major cash flow crunch and lead to a surprise loss when the project is finally completed. Diligent internal tracking of costs against your budget is the only way to prevent this.

Can my business use both the Completed Contract and Percentage of Completion methods? Yes, you can use both methods, but the choice isn't arbitrary. The method you choose must be appropriate for the specific contract you're working on. You might use the Percentage of Completion method for a project with clear, measurable milestones and a predictable outcome. For a different project filled with major uncertainties where you can't reliably estimate progress, the Completed Contract Method would be the correct choice. The key is to be consistent and able to justify your accounting treatment for each contract based on its unique characteristics.

How does CCM affect my ability to get a business loan? It can make it more challenging. Lenders prefer to see smooth, predictable revenue streams when they assess a company's ability to repay a loan. The Completed Contract Method creates lumpy financials, with periods of low revenue followed by a huge spike. To overcome this, you'll need to provide supplementary information beyond your standard income statement, such as detailed internal reports, a strong project pipeline, and solid cash flow projections to give the lender a true picture of your company's financial health.

What happens if a project is cancelled before it's finished? If a project is terminated early, you generally have to recognize any revenue, expenses, and resulting profit or loss in that accounting period. The specifics really depend on the terms written into your contract. The contract should outline what costs are recoverable and what you are entitled to be paid for the work completed to date. This is a situation where having a clearly written contract and consulting with your accountant are absolutely essential to determine the correct financial treatment.

Is the Completed Contract Method still relevant under ASC 606? Absolutely. While the new revenue recognition standards under ASC 606 favor methods that reflect performance over time, CCM still has a very important role. It is the appropriate method to use when the outcome of a project cannot be reasonably measured until it is complete. If you genuinely cannot determine your progress or final costs with any certainty, using CCM is the most compliant way to account for the contract, ensuring you don't recognize revenue before it's truly earned.