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Get a clear, practical explanation of the completed contract method, including who qualifies, how it works, and tips for accurate project accounting.
Long-term contracts can create a serious cash flow problem. You're paying taxes on income you've technically earned but haven't actually collected, putting a major strain on your working capital. The completed contract method directly solves this. This accounting approach lets you defer recognizing revenue—and the resulting tax bill—until the project is fully completed and accepted. This means more cash stays in your business to cover costs while the work is in progress. While the tax deferral is a huge advantage, the completed contract method of accounting is only available for certain businesses. Here’s what you need to know about who qualifies and how to use this strategy effectively.
If you manage long-term projects, you know that recognizing revenue isn’t always straightforward. The Completed Contract Method (CCM) is one way to approach this. It’s an accounting practice that lets you wait until a project is fully finished before you record any of the revenue or expenses on your income statement. Think of it as holding off on the financial paperwork until the job is truly done. This approach differs from methods where you recognize revenue in stages as you hit certain milestones. With CCM, everything is recorded in one go at the very end, which can simplify accounting for certain types of projects.
At its core, the Completed Contract Method is a rule of patience. It requires you to postpone recognizing all revenue and expenses associated with a specific contract until it's complete. Instead of booking income as you work, you accumulate all project-related costs in an inventory account on your balance sheet. Likewise, you'll track payments received from the client as a liability. Once the project is finished and delivered, you move everything over to the income statement, recognizing the full revenue and all associated costs at once. This gives a clear, final picture of a project's profitability, but only at its conclusion.
The main principle of CCM is deferral. You defer all financial recognition until the final performance obligation is met. This means that throughout the life of a project, your income statement won't reflect any of the work you're doing on that contract. All costs are held in a "Construction in Progress" asset account, and all billings are held in a "Billings on Construction in Progress" liability account. When the project is complete, these accounts are zeroed out, and the revenue and expenses are finally reported. This all-at-once approach is what makes CCM distinct from other revenue recognition methods.
A common misconception is that any business with long-term contracts can use CCM. In reality, it’s best suited for specific situations. This method is ideal for short-term contracts or projects where the total costs are difficult to estimate reliably from the start. If you can't confidently predict your expenses, recognizing revenue in stages could lead to inaccurate financial reporting. CCM avoids this by waiting until all the numbers are in. It’s also a practical choice for companies that juggle many small, one-time jobs simultaneously, as it simplifies the accounting process for each individual contract.
The term "complete" can be a bit fuzzy, but in accounting, it has a specific meaning. A project is considered complete under CCM when it's substantially finished and the client has accepted it. This doesn't mean every single tiny detail has to be wrapped up. Generally, a contract is deemed complete when the remaining costs are insignificant. For example, if the final touches are minor administrative tasks or a small cleanup job, you can usually consider the project complete and recognize the revenue. Defining this milestone clearly is key to using the method correctly, and an automated system can help ensure consistency. You can schedule a demo to see how HubiFi helps businesses set and track these criteria.
So, you're intrigued by the idea of deferring revenue and taxes until a project is wrapped up. It sounds great, but before you jump in, you need to figure out if you're even allowed to use the completed contract method (CCM). This isn't a free-for-all accounting strategy; the IRS has some pretty specific rules about who gets to use it. Think of it as a special exception carved out for certain types of businesses, primarily smaller contractors and homebuilders working on shorter-term projects.
Your eligibility hinges on a few key factors: the length of your contracts, the size of your business (measured by your average annual gross receipts), and the specific nature of your work. If your projects regularly stretch beyond two years or your business is considered large by IRS standards, CCM is likely off the table. The regulations are designed to prevent large corporations from indefinitely deferring massive amounts of tax liability. For smaller businesses, however, it can be a powerful tool for simplifying accounting and managing cash flow. Let's break down the specific requirements you'll need to meet.
The first major hurdle is time. The completed contract method is designed for projects that you expect to complete within two years from the start date. This rule keeps the method focused on relatively short-term work. If you’re building a skyscraper that will take five years, this isn't the method for you. The goal is to prevent revenue from being deferred for an excessively long period. Sticking to this two-year window is a critical piece of staying compliant and accurately reflecting your company's financial performance over time.
For tax purposes, a "long-term contract" is simply one that spans across two different tax years. However, to use the completed contract method, you have to meet a stricter requirement: the project must be expected to wrap up within two years of its start date. This two-year window is a critical factor in determining if you qualify for CCM. The definition of "complete" is also practical. It doesn’t mean every last detail is perfect; it means the project is substantially finished and the client has accepted it. Once the remaining costs or tasks are minor, you can generally consider the contract complete and recognize the revenue.
Next, let's talk about who qualifies. CCM is generally reserved for homebuilders and small contractors. To be considered a "small contractor," your business must pass the IRS gross receipts test. This means your average annual gross receipts for the three preceding tax years can't exceed a certain threshold (this amount is adjusted for inflation, so it's always good to check the latest figures). This requirement ensures that only smaller-scale operations can take advantage of the significant tax deferral this method offers, keeping the playing field level.
The key to qualifying as a "small contractor" is the IRS gross receipts test. To pass, your business's average annual gross receipts for the three preceding tax years must fall below a specific dollar amount. This isn't a set-it-and-forget-it number; the IRS adjusts this threshold for inflation, so you'll need to verify the current limit for the tax year in question. This financial cap is in place to ensure that CCM remains a tool for smaller businesses to manage cash flow, rather than a loophole for large corporations to delay tax payments indefinitely. Tracking your gross receipts accurately over a three-year period is critical for compliance, and having a system that can consolidate this data is a huge help. With the right integrations, you can pull information from your various platforms to make this calculation straightforward.
Even if you're a small contractor, the type of work you do matters. For home construction contracts, there are specific guidelines you have to follow. At least 80% of the estimated total contract costs must be for building or improving dwelling units in a building with four or fewer units. This includes the land on which the units are built. So, if you're primarily building large apartment complexes or commercial properties, you likely won't qualify under this provision. It’s a niche rule, but it’s essential for homebuilders who want to use CCM.
The main draw of CCM is its impact on your taxes. This method allows you to defer recognizing income—and the resulting tax liability—until the contract is fully completed and accepted by the client. This can be a huge advantage for managing cash flow, as you won't be paying taxes on money you haven't fully earned or collected yet. However, it also means you could face a large tax bill in the year a project finishes. Proper financial planning is crucial to ensure you have the funds ready when that tax liability comes due.
Here’s a curveball you need to be aware of: the Alternative Minimum Tax (AMT). Think of the AMT as a separate, parallel tax system designed to ensure businesses with high incomes can't use deductions and deferrals to pay little to no tax. While you might use the completed contract method for your regular tax return, the IRS requires you to use the percentage of completion method for AMT calculations. This means that even if your regular tax method shows minimal income for the year, your AMT calculation could show significant income, potentially triggering an unexpected tax liability. This can disrupt the very cash flow benefits you were trying to achieve with CCM and adds a layer of complexity to your tax planning.
What if you want to start using CCM, or what if your business grows and you no longer qualify? You can't just flip a switch. Changing your accounting method is a formal process that requires the IRS's permission. To do this, you'll generally need to file Form 3115, Application for Change in Accounting Method. The IRS wants to ensure that a change in accounting method doesn't result in income being skipped or double-counted, so the transition often requires a special adjustment. Whether you're switching to or from CCM, it's a significant move with tax implications. Having clean, organized financial data is crucial for this process, and a system with seamless integrations ensures you have everything you need to make the transition smooth and compliant.
It's important to remember that CCM is the exception, not the rule. For most long-term contracts, the IRS generally requires contractors to use the percentage of completion method, where you recognize revenue incrementally as you complete parts of the project. Small contractors who meet the specific criteria we've discussed are given the option to elect CCM instead. This choice should be made carefully, as switching between accounting methods can be complex. Always ensure you meet all the requirements before deciding this is the right path for your business.
High-risk projects are full of unknowns—costs can balloon, and timelines can shift without warning. This is where the Completed Contract Method really shines. Instead of trying to recognize revenue in stages when you can't reliably predict your final expenses, CCM lets you wait until the dust settles. This approach helps you avoid inaccurate financial reporting that can happen when you book income prematurely, only to have costs change later. By deferring all revenue and expense recognition until the project is finished, you ensure the final numbers are solid and reflect the true profitability of the job. This deferral also provides a significant cash flow advantage, as you delay the associated tax liability, keeping more cash on hand to manage any unexpected challenges that arise.
The completed contract method (CCM) is a straightforward approach to accounting for long-term projects. Instead of recognizing bits and pieces of income and expenses as you go, you wait until the entire project is finished. Think of it as holding off on counting your earnings until the job is officially done. This method simplifies bookkeeping, especially for projects where costs and outcomes are hard to predict along the way.
During the project, you’ll keep track of all your costs and client billings on the balance sheet. Nothing hits your income statement—and therefore your profit or loss—until you meet the contract's completion criteria. Once the project is complete, you move all the accumulated revenue and expenses to the income statement in one single entry. This gives you a clear, final picture of the project's profitability in that specific accounting period. Let's break down how each piece of this process works.
With the completed contract method, you postpone recognizing revenue until the contract is substantially complete. This means that even if you’re billing your client in installments throughout the project, you don’t record any of that as income on your books yet. All the revenue you’ve earned from the project is recognized in a single lump sum during the accounting period when the work is finished. This approach to revenue recognition is ideal for projects where the final outcome is uncertain until the very end, as it prevents you from overstating your income prematurely.
Just like revenue, you defer all project-related expenses until the contract is complete. As you pay for materials, labor, and other direct costs, you don’t immediately expense them. Instead, these costs accumulate in an asset account on your balance sheet, often called "Construction in Progress." When the project is officially done, you’ll move the total accumulated cost from the balance sheet to the income statement. This ensures that your expenses are perfectly matched against the revenue they helped generate, giving you a true measure of the project's profitability all at once.
Properly recording transactions is key to making CCM work. Throughout the project, you’ll track costs in your "Construction in Progress" asset account. When you bill your client, you’ll record it in a separate account, typically a contra-asset account called "Billings on Construction in Progress." This keeps your balance sheet accurate without touching the income statement. Having the right data integrations between your project management and accounting software is essential for keeping these records clean and balanced, preventing major headaches when it's time to close out the project.
Meticulous cost tracking is non-negotiable when using the completed contract method. Since you can’t determine profitability until the end, you need a precise record of every dollar spent. This method is most suitable for projects where it's difficult to estimate costs accurately from the start. You must diligently assign all direct material, labor, and overhead costs to the specific project. Without a reliable system for tracking these expenses, you risk miscalculating your final profit or loss. This is where automated financial solutions can make a huge difference in maintaining accuracy.
So, what does "complete" actually mean? It’s not always as simple as sending the final invoice. A project is generally considered complete when only minor tasks or costs remain. Your contract should clearly define the criteria for completion. This could be the client's formal acceptance of the work, a final successful inspection, or the point at which the project is ready for its intended use. Establishing these terms upfront is crucial for accurate accounting and ensuring you remain in line with ASC 606 compliance guidelines, which govern how and when you can recognize revenue.
To add a bit more clarity to the idea of "completion," many accountants use the 95% completion rule as a practical benchmark. This guideline states that a project can be considered complete once you've incurred at least 95% of the total estimated costs. It acknowledges that waiting for every single minor detail to be wrapped up isn't always practical for financial reporting. This rule provides a clear, objective measure for determining when a project is substantially finished and the client has accepted it. By using this threshold, you can consistently decide when to recognize revenue and expenses, which helps keep your financial statements reliable and avoids subjective judgment calls from one project to the next.
The Completed Contract Method (CCM) can be a great fit for certain businesses, but it’s not a one-size-fits-all solution. Like any accounting method, it comes with a distinct set of advantages and disadvantages. The simplicity of CCM is often its biggest draw, but that simplicity can also create a distorted picture of your company's financial health. Before you decide if it’s the right approach for your projects, it’s important to weigh both sides of the coin. Let's break down what this means for your operations, tax planning, and financial reporting.
The biggest perk of the Completed Contract Method is its simplicity. Because you defer all revenue and expense recognition until a project is 100% complete, you avoid the complex calculations required by other methods. There’s no need to estimate progress or allocate costs and revenues throughout the project's lifecycle. This straightforward approach can significantly reduce the administrative burden on your accounting team, freeing them up to focus on other tasks. For businesses juggling multiple short-term projects, this simplification makes financial reporting much more manageable and less prone to the errors that can come with ongoing estimations. You can find more helpful articles on streamlining your financial operations on the HubiFi blog.
From a tax perspective, CCM offers a powerful advantage: deferral. By waiting to recognize income until a contract is complete, you also get to delay the associated tax liability. This allows you to hold onto your cash longer, which can dramatically improve your working capital throughout the life of a project. Instead of paying taxes incrementally, you can keep that money in your business, using it to cover operational costs, invest in new equipment, or manage unexpected expenses. This ability to defer income and the related taxes is one of the most compelling reasons why contractors choose CCM, especially when managing long-term projects with tight margins.
The tax benefits of CCM directly translate to better cash flow management. When you aren't required to pay taxes on profits that you haven't fully realized in cash, you have more financial flexibility. This is especially helpful for contractors who often face significant upfront costs for materials and labor long before they receive final payment. By keeping more cash on hand during the project, you can reduce your reliance on lines of credit or other forms of financing to stay afloat. This improved liquidity ensures you can pay your suppliers, meet payroll, and handle the day-to-day costs of business without straining your finances while waiting for a project to conclude.
Here’s where the downsides of CCM start to appear. While simple, this method can create a lumpy and potentially misleading picture of your company's performance. Your income statement will show little to no activity for the duration of a project and then a sudden, massive spike in revenue and profit once it's complete. This can cause significant fluctuations from one accounting period to the next, making it difficult for investors, lenders, and even internal stakeholders to gauge your company's true financial stability. If you're seeking a loan or trying to attract investors, these inconsistent financial statements can be a major red flag. Gaining better data visibility can help you explain these fluctuations, and you can schedule a demo to see how.
Under the Completed Contract Method, your balance sheet does all the heavy lifting while a project is underway. Throughout the project, you’ll keep track of all your costs and client billings on the balance sheet, ensuring nothing hits your income statement prematurely. All your expenses—from materials to labor—accumulate in an asset account, usually called "Construction in Progress." At the same time, any payments you receive from the client are recorded in a liability account, often named "Billings on Construction in Progress." These two accounts grow over the life of the project. Once the work is complete, you zero out both accounts, transferring the final revenue and total expenses to the income statement. This keeps your financial reporting clean and prevents you from showing a profit or loss before the project is truly finished.
The inconsistency created by CCM isn't just a reporting headache; it can pose real financial risks. If several large projects happen to finish in the same fiscal year, your company's income could skyrocket unexpectedly. This sudden surge in profit could push you into a much higher tax bracket, resulting in a larger-than-anticipated tax bill that you may not have budgeted for. This lack of steady, predictable financial data makes long-term planning more challenging. Without a clear, consistent view of your revenue streams, it's harder to make strategic decisions about hiring, expansion, or taking on new, larger projects.
While deferring income is a major benefit of CCM, there's a flip side: you also have to delay deducting your project-related expenses. This means all the money you spend on labor, materials, and subcontractors throughout the project can't be used to lower your taxable income until the contract is complete. This creates a timing mismatch that can strain your cash flow, as you're spending real money today but won't see the tax benefit from those expenditures until much later. It’s a situation that requires careful financial planning to ensure you’re not caught off guard by your tax obligations in the years you’re incurring costs but not yet recognizing the corresponding deductions.
Deferring your tax liability for a year or two can feel like a win, but it also introduces an element of uncertainty you can't control. Tax laws can and do change. If tax rates increase between the time you start a project and the time you complete it, you’ll end up paying taxes on the entire project's profit at the new, higher rate. What initially seemed like a smart deferral strategy could ultimately cost you more in taxes than if you had paid them incrementally. This risk is entirely outside of your control, making it a significant gamble, especially on projects that are pushing the two-year completion limit. It underscores the importance of having clear visibility into future liabilities to make the most informed decisions.
Choosing an accounting method isn't just about crunching numbers; it's about finding the approach that best tells your company's financial story. The Completed Contract Method (CCM) is a straightforward option, but it’s not the only one available. Its main counterpart is the Percentage of Completion Method (PCM), and understanding the differences is key to making the right choice for your business.
Each method has its own rules for compliance and best practices for implementation. Let's walk through how CCM stacks up against PCM so you can determine which one aligns with your projects, your industry, and your financial goals.
The biggest difference between the Completed Contract Method and the Percentage of Completion Method comes down to timing. With CCM, you wait until a project is 100% finished before you record any of the revenue or expenses on your income statement. Think of it as an all-or-nothing approach. All the financial activity hits your books in one single period at the very end of the contract.
On the other hand, the Percentage of Completion Method recognizes revenue and expenses gradually, in proportion to the work you've done. As you hit certain milestones or incur a percentage of the total expected costs, you record a corresponding percentage of the revenue. This method provides a more consistent, real-time view of your profitability throughout a long-term project.
Let's get practical. Imagine you have a six-month project. If you use CCM, your income statement will show zero revenue and zero project-related expenses for the first five months. Then, in the sixth month when the project is complete, all the income and costs are reported at once. This can create significant swings in your financial reporting, showing a major profit spike in the final month.
With PCM, you’d report a portion of the revenue and expenses each month. If you're 20% done with the work after month one, you recognize 20% of the total expected revenue. This smooths out your financial statements, making your company's performance look more stable over time. This approach offers a clearer picture of ongoing operations, which is why many businesses rely on robust revenue recognition software to track progress accurately.
While the Completed Contract and Percentage of Completion methods are the go-to standards for long-term projects, they aren't the only options on the table, especially for smaller contractors. If your business doesn't meet the criteria for those methods or you're looking for a simpler way to manage your books, there are two fundamental accounting methods you should know about: cash and accrual. These form the basis of all accounting and can be perfectly suitable depending on the size and complexity of your operations. Understanding how they work will help you choose the right foundation for your financial reporting.
The cash method is exactly what it sounds like: you recognize income when cash comes in and expenses when cash goes out. If a client pays you, that's when you record the revenue. If you pay a supplier, that's when you deduct the expense. It’s a simple, checkbook-style approach to accounting that reflects your immediate cash position. This method is often favored by small contractors because it's easy to maintain and provides a clear, real-time picture of how much cash you have on hand. It keeps things straightforward, which is a huge plus when you're managing everything yourself.
The accrual method offers a more comprehensive view of your financial health. With this approach, you record income when you've earned it—for example, when you send an invoice—even if you haven't been paid yet. Similarly, you record expenses when you incur them, not when you actually pay the bill. This method matches your revenues with the expenses you took on to earn them in the same accounting period. While it requires a bit more tracking, it provides a much more accurate picture of your profitability over time, which is something lenders and investors prefer to see.
So, which method should you use? CCM is often a good fit for short-term projects (typically those lasting less than a year) where the outcome is uncertain. If you can't reliably estimate the total costs or progress, waiting until the end to recognize revenue is the safer, more conservative choice. It simplifies the accounting process since you don't have to make complex ongoing estimates.
PCM is better suited for long-term, predictable projects where you can confidently measure progress. If you have a solid project plan with clear milestones and accurate cost estimates, PCM provides a more accurate reflection of your financial performance over time. If you're struggling to decide which method fits your business, it might be helpful to schedule a demo to talk through your specific revenue streams.
Compliance is non-negotiable, and both methods have rules you need to follow. Generally, accounting standards and tax regulations, like those from the IRS, prefer the Percentage of Completion Method for long-term contracts. This is because it more accurately matches revenue and expenses to the periods in which they are earned and incurred, a core principle of accrual accounting.
However, there are exceptions that allow for CCM, especially for smaller contractors or short-term projects. It's crucial to understand the specific ASC 606 requirements and IRS guidelines for your industry and business size. Using the wrong method can lead to compliance issues and financial restatements, so always consult with an accounting professional to ensure you're making the right choice.
Whichever method you choose, a smooth process depends on solid record-keeping. If you opt for CCM, you must be diligent about tracking every single cost related to the project, since they all need to be deferred and recognized at the end. Messy records can turn the final accounting into a major headache.
For PCM, the key is having a reliable system for measuring progress. Whether you base it on costs incurred, labor hours, or physical completion, your method must be consistent and verifiable. In both cases, clear contract language is essential. Your contracts should explicitly define what constitutes "completion" or outline the milestones for progress payments. Leveraging tools with seamless data integrations can automate much of this tracking, reducing errors and saving you time.
Is the Completed Contract Method the same as cash-basis accounting? That’s a great question, and it’s a common point of confusion. While they might seem similar because they both delay recognizing income, they are fundamentally different. The Completed Contract Method is a form of accrual accounting. You still track all your project-related costs and billings on your balance sheet as they occur. You just wait to move them to the income statement until the project is finished. Cash-basis accounting, on the other hand, only records transactions when money actually changes hands, which is a much simpler system.
What happens if a project I expected to finish in under two years takes longer? This is where things can get tricky. The two-year completion window is a key requirement for eligibility. If a project unexpectedly extends beyond that timeframe, you may be required to switch to the Percentage of Completion Method for that specific contract, potentially even amending past tax returns. This is why it's so important to have realistic project timelines from the start and to consult with an accounting professional if you foresee significant delays.
Will using CCM make it harder to get a business loan? It certainly can. Lenders and investors prefer to see smooth, predictable revenue streams. Because CCM creates long periods of no reported income followed by a sudden large spike, it can make your financial statements look erratic and unstable. If you use this method and plan to seek financing, be prepared to provide supplemental documentation, like a detailed list of projects in progress and their expected profitability, to give lenders a clearer picture of your company's true financial health.
Can I use CCM for some projects and another method for others? You have to be consistent in your accounting practices. Generally, you must use the same method for all similar types of contracts. However, it is possible to use CCM for projects that meet the specific qualifications (like short-term home construction) while using a different method, like Percentage of Completion, for other long-term contracts that don't qualify. This approach requires careful bookkeeping to keep everything separate and compliant, so it's a strategy you should definitely discuss with your accountant first.
What's the most important thing to get right when using CCM? Without a doubt, it's meticulous cost tracking. Since you don't recognize any expenses until the very end of the project, you need a rock-solid system for capturing every single dollar spent on materials, labor, and overhead. If your records are messy, you won't have an accurate view of the project's profitability when it's time to close it out. A small error in tracking can lead to a big miscalculation of your final profit and tax liability.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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