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Completed Contract MethodEdit

The Completed Contract Method is a way of handling revenue recognition for long-term contracts, most often seen in construction and related industries. Under this approach, revenue and any associated gross profit are not recognized until the contract is completed and accepted by the customer. Instead, costs incurred during the life of the project are accumulated as work-in-progress, creating a balance sheet presentation that shows ongoing costs without corresponding revenue until completion. This method sits alongside other approaches in US GAAP for how contract work is reported, and it contrasts with the more widely used Percentage of completion method, which recognizes revenue as work progresses.

In practice, the CCM is most familiar to smaller firms or projects where outcomes are highly uncertain for extended periods. It can provide tax and cash-flow advantages by deferring income recognition until a project is finished, which may align with actual receipt of payment in some arrangements. However, it also tends to delay the appearance of profits on the income statement, potentially masking the true economic performance of ongoing work and complicating external assessments of financial health. Because of its delay in recognizing revenue, CCM can make a firm’s financial results look stronger or weaker in a given period depending on whether major contracts are still in progress. For international readers, the CCM is generally not the standard in many non-U.S. accounting frameworks, where other methods for long-term contracts are favored or required by local standards such as IFRS.

Overview

  • Core concept: Revenue and gross profit are recognized only at contract completion; costs are tracked as they are incurred.
  • Typical users: Firms in construction, heavy engineering, and other industry sectors with long project horizons and uncertain outcomes.
  • Balance sheet impact: Costs incurred on active contracts are carried as work-in-progress (WIP); the corresponding revenue is not recognized and there is no gross profit until completion.
  • Comparability: Because the method defers profit to the end of projects, year-to-year comparisons can be less reflective of current performance than under methods that recognize progress, such as the Percentage of completion method.

History and regulatory framework

The CCM emerged as one of several options under early guidance for contract accounting in the United States. Over time, standard-setters allowed it as a legitimate method for certain contracts, particularly when outcomes could not be reliably estimated. In many jurisdictions and under newer international frameworks, the tendency has moved toward recognizing revenue earlier in the contract life, using a progress-based approach, so the CCM has become less common outside specific niches. Readers should distinguish between financial reporting practice under US GAAP and the requirements that apply under IFRS or other international regimes, where the natural expectation is to reflect ongoing work through a measure of stage of completion rather than awaiting final completion.

Mechanics and accounting entries

  • Recording of costs: As work proceeds, costs are debited to Work in progress and accumulated on the balance sheet. This includes labor, materials, and other direct project costs.
  • Billing and cash flow: In some arrangements, billing might occur in progress milestones, but no corresponding revenue is recognized under CCM until completion.
  • Revenue and profit recognition: At contract completion, the company recognizes the full contract revenue (the contract price) and the full accumulated costs, with the difference recorded as gross profit on that contract.
  • Losses: If a contract becomes unprofitable, the expected loss is recognized in the period in which it becomes evident, rather than being spread over the life of the contract.

Some terms commonly involved in CCM discussions are linked in encyclopedia fashion: Work in progress and Contract concepts, as well as general Revenue recognition frameworks and the specific US GAAP guidance that governs contract accounting.

Pros and cons

  • Pros

    • Simplicity in uncertain, long-duration projects where outcomes cannot be reliably estimated.
    • Potential tax and cash-flow advantages by deferring income recognition until completion.
    • Reduced risk of overstating profits in early contract years when outcomes are highly uncertain.

  • Cons

    • Income and profit can be highly volatile from project to project, especially if a few large contracts finish in a given period.
    • The financial statements may obscure the ongoing profitability of active contracts, potentially misleading creditors or investors about operating performance.
    • In jurisdictions or standards where ongoing revenue recognition is required, CCM may not be permissible or may be heavily restricted.
    • When comparisons across firms or periods are needed, CCM can hinder comparability due to differences in contract mix and completion timing.

Controversies and debates

Debates around the CCM often center on transparency and financial reporting quality. Critics argue that deferring revenue until completion can hide the true economics of ongoing projects, delaying tax liabilities and potentially masking margin erosion in early phases of a contract. Proponents contend that CCM is appropriate where outcomes are too uncertain to allocate revenue credibly over time, and that it avoids premature recognition of profits that could later prove unreliable. In practice, the choice of CCM versus a progress-based method can influence the perceived risk profile and creditworthiness of a contractor, and voices on both sides frequently point to the effects on lenders, equity investors, and tax planning.

As with many accounting choices, the CCM is sometimes part of broader debates about measurement, comparability, and the role of standards in reflecting economic reality. When evaluating a company that uses CCM, analysts often look to contract portfolios, the mix of completed versus in-progress work, and the disposition of billings in excess of or under costs to gauge the efficiency and risk in ongoing projects. The tension between simplicity and timely recognition remains a central theme in discussions of contract accounting.

See also