Percentage of completion
DEFINITION
Percentage of completion is a revenue recognition method that lets a business recognize revenue and expenses for a long-term contract in proportion to the work finished during each reporting period, rather than waiting until the contract is fully delivered.
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Percentage of completion is a revenue recognition method that lets a business recognize revenue and expenses for a long-term contract in proportion to the work finished during each reporting period, rather than waiting until the contract is fully delivered. It applies to arrangements that span multiple accounting periods, such as construction projects, custom software builds, or long-term service and implementation contracts.
Under this method, revenue is matched to progress rather than to invoicing or cash collection. A company measures how much of the total contract has been completed as of a given date, using a consistent input like costs incurred, labor hours, or units delivered, and recognizes that proportion of the total contract revenue. For a subscription or usage-based business, most revenue is recognized as service is delivered period by period, but any contract with a discrete, multi-period deliverable, such as an implementation or professional services engagement bundled with a subscription, can call for the same proportional logic. A billing and revenue platform such as Recurly can help track the data these calculations depend on, including contract values, costs, and delivery milestones, though the percentage of completion calculation itself is usually performed in a company's revenue recognition or ERP system.
Why percentage of completion matters for subscription businesses
Recognizing revenue only at the end of a long contract can distort a company's financial performance, especially when a single engagement spans several quarters. Percentage of completion spreads recognition across the life of the contract so that reported revenue tracks the work delivered, which gives finance teams, auditors, and investors a more accurate read on performance in any given period.
This supports accurate financial reporting and compliance with standards such as ASC 606 and IFRS 15, both of which require revenue to be recognized as control of a good or service transfers to the customer, not when cash changes hands. For companies that combine subscription revenue with implementation, onboarding, or custom development work, applying percentage of completion to the project-based portion of a deal keeps the full revenue picture consistent and audit-ready.
How percentage of completion works
The method compares progress made to date against the total expected scope of the contract, then applies that ratio to the total contract value.
Estimate total contract revenue and total expected costs (or another reliable progress measure) at the start of the contract.
At each reporting period, measure actual progress to date, most commonly costs incurred so far.
Divide progress to date by total expected progress to get a completion percentage.
Apply that percentage to total contract revenue to determine cumulative revenue earned to date.
Subtract revenue already recognized in prior periods to find the revenue to recognize in the current period.
Re-estimate total costs and revenue each period, since estimates can change as the project unfolds, and adjust recognized revenue accordingly.
Because the method relies on estimates, it requires a reasonably reliable way to measure progress and a contract where both revenue and costs can be estimated with confidence. When those conditions are not met, an alternative method is usually required.
How to calculate percentage of completion
The core formula is:
Percentage complete = Costs incurred to date / Total estimated contract costs
Revenue recognized to date = Percentage complete x Total contract revenue
Revenue for current period = Revenue recognized to date - Revenue recognized in prior periods
Illustrative example (hypothetical figures):
Imagine a company signs a $500,000 contract to build a custom integration, with total estimated costs of $300,000.
By the end of year one, the company has incurred $150,000 in costs.
Percentage complete = $150,000 / $300,000 = 50%
Revenue recognized to date = 50% x $500,000 = $250,000
With no revenue recognized in a prior period, the company recognizes $250,000 in year one.
In year two, the company incurs another $120,000 in costs (cumulative costs of $270,000), so percentage complete rises to $270,000 / $300,000 = 90%, and cumulative revenue recognized becomes 90% x $500,000 = $450,000. Revenue recognized in year two alone is $450,000 - $250,000 = $200,000.
How to use percentage of completion
Applying the method well depends on a few practical controls:
Build cost and revenue estimates at contract signing, and document the basis for those estimates.
Choose a consistent progress measure, such as cost-to-cost, and apply it the same way across similar contracts.
Reforecast total costs and revenue every reporting period rather than only at contract milestones, so estimates stay current.
Reconcile recognized revenue against actual billing and cash collected, since the two rarely match exactly during the life of the contract.
Flag contracts where cost estimates are highly uncertain, since unreliable estimates can disqualify a contract from this method.
Percentage of completion vs completed contract method
The completed contract method recognizes all contract revenue and costs at once, when the contract is finished, rather than spreading them across the life of the project. Percentage of completion is generally preferred when progress and costs can be reliably estimated, because it reflects performance period by period. The completed contract method is usually reserved for short-term contracts or situations where reliable estimates are not available, since it defers all recognition until completion regardless of how much work has been done along the way.
Benefits and examples
More accurate periodic reporting, since revenue lines up with delivery and avoids large swings where an entire contract's revenue lands in a single quarter.
Better forecasting, since continuously tracked progress gives finance teams earlier visibility into whether a contract is on pace, ahead, or behind its cost estimates.
Standards alignment, since the proportional approach is consistent with the transfer-of-control principle in ASC 606 and IFRS 15 for contracts where progress can be reliably measured.
Useful for hybrid revenue models: a company selling subscriptions alongside a multi-month implementation can apply percentage of completion to the implementation while recognizing subscription revenue on its normal schedule, keeping both streams matched to delivery.
Frequently asked questions
What types of contracts use percentage of completion? It is most common for long-term contracts where deliverables span multiple reporting periods, such as construction, custom software development, engineering projects, and large professional services or implementation engagements.
Is percentage of completion required under ASC 606? ASC 606 does not name "percentage of completion" specifically, but it requires recognizing revenue over time when certain criteria are met, and a percentage of completion input method, such as cost-to-cost, is a common way to measure that progress.
What happens if cost estimates change mid-contract? Estimates are updated each reporting period, and the change is reflected prospectively, meaning the adjustment applies to current and future periods rather than restating revenue already recognized.
Can a company change methods partway through a contract? Switching methods mid-contract is unusual and generally requires clear justification, such as a change in the reliability of estimates, since consistency in method supports comparable financial reporting.
