Definition
Revenue recognition is the accounting rule for when revenue is recorded — not necessarily when cash is received. For contractors, revenue can be recognized at a single point (completed contract method) or spread over a project's duration (percentage-of-completion method). The choice significantly affects when profit appears on the P&L.
Why It Matters
A contractor who receives a $500,000 deposit on a 12-month project must decide: does that $500k hit revenue today, or is it earned gradually as the work progresses? Recognizing revenue too early overstates profit; too late understates it. For larger contractors (typically over $25M in annual revenue), GAAP and tax rules may require percentage-of-completion. Smaller contractors often use simpler methods but should understand the tradeoffs.
Field Example
A contractor signs a $300,000 contract. At month 3, the project is 40% complete ($120k of costs incurred out of $300k estimated total cost). Under percentage-of-completion, the contractor recognizes $120,000 of revenue (40% × $300k contract). Under completed-contract, zero revenue is recognized until the project is done.
Calculation / Formula (if applicable)
Percentage of Completion = Costs Incurred to Date ÷ Total Estimated Costs
Revenue to Recognize = % Complete × Total Contract Value
Overbilling = Billings to Date > Revenue Earned to Date
Underbilling = Revenue Earned to Date > Billings to Date
Software Application
Track incurred costs and estimated total costs per job. Calculate % complete automatically. Show earned revenue vs. billed revenue to identify overbilling and underbilling. Generate WIP (Work in Progress) schedule for accountant review.
Tooltip Version
Revenue recognition determines when revenue is counted on your P&L — not always when cash arrives. Contractors using percentage-of-completion recognize revenue as work progresses.
Related Objects
Related: