Percentage of Completion Method: Revenue Recognition for 2026

The percentage of completion method is an accounting approach that recognises revenue and expenses based on the proportion of a project that has been completed during a reporting period. Unlike the completed contract method, which only recognises revenue at the end of a project, the POC method spreads revenue recognition over the life of the contract.

Who Uses the POC Method?

The POC method is particularly relevant for:

• Builders and contractors
• Engineering firms
• Large-scale renovators
• Software developers working on multi-phase projects

These businesses often work on contracts that extend over multiple reporting periods, making it essential to match revenue with the actual progress of work.

Key Benefits

• Smoother financial reporting: Revenue and expenses are matched to project progress, reducing volatility in financial statements.
• Improved transparency: Stakeholders get a more accurate view of business performance.
• Better cash flow management: Aligning revenue with work completed helps with forecasting and budgeting.

The POC method involves estimating the total costs of a project, tracking costs incurred to date, and calculating the percentage of the project that has been completed. Revenue is then recognised in proportion to this percentage.

Basic Calculation Steps

1. Estimate total project costs (including materials, labour, and overheads).

2. Measure costs incurred to date.

3. Calculate percentage complete:

   (Costs to date / Total estimated costs) x 100

4. Apply the percentage to contract revenue:

   Recognised revenue = Contract value x Percentage complete

Example

Suppose a company is halfway through a $2 million contract and has incurred $1 million in costs, with total estimated costs of $2 million. The percentage complete is 50%, so the business can recognise $1 million in revenue for the reporting period.

Construction and Engineering

Australian construction firms working on large infrastructure projects often use the POC method to report progress to banks, investors, and regulators. This approach provides a phased view of revenue that aligns with project milestones and contractual obligations.

Software and IT Services

Businesses developing custom software or IT solutions over several months can use the POC method to recognise revenue as specific deliverables or modules are completed. This helps with cash flow management and provides clients and stakeholders with transparent updates on project progress.

Government and Public Sector Projects

Long-term government contracts, such as digital transformation initiatives, also benefit from the POC method. Transparent reporting is essential for compliance and accountability, especially when projects span multiple years.

Australian financial reporting standards continue to align with international guidelines, emphasising transparency and accuracy. The Australian Accounting Standards Board (AASB) maintains strict criteria for revenue recognition, particularly under AASB 15 Revenue from Contracts with Customers.

Key Compliance Considerations

• Contract analysis: Businesses must identify separate performance obligations within contracts and assess each for POC eligibility.
• Documentation: Clear records of project progress, cost estimates, and any changes to scope are essential.
• Audit readiness: Accurate and timely POC reporting is increasingly important as regulatory scrutiny grows.

Cloud-based accounting platforms have enhanced their POC reporting features, making it easier for businesses of all sizes to stay compliant and maintain transparency.

Adopting the POC method offers several strategic benefits:

• Clearer financial health: Stakeholders receive timely and accurate information about business performance.
• Improved forecasting: Matching revenue to project progress supports better budgeting and cash flow planning.
• Reduced risk of profit shocks: Recognising revenue gradually helps avoid large swings in reported profits at project completion.
• Stronger position in negotiations: Transparent reporting can support applications for finance or new contracts.

While the POC method offers many advantages, it also requires careful management:

• Accurate cost estimation: Underestimating or overestimating total project costs can distort revenue recognition.
• Ongoing monitoring: Regularly updating cost estimates and project progress is essential.
• Complex contracts: Projects with multiple deliverables or changing scopes may require detailed analysis to ensure compliance.

1. Review contracts: Identify which contracts are suitable for the POC method based on their duration and performance obligations.
2. Set up tracking systems: Use accounting software or internal processes to monitor costs and progress.
3. Train staff: Ensure your finance and project teams understand the requirements and processes involved.
4. Document thoroughly: Keep detailed records of estimates, progress, and any changes to the project scope.
5. Consult professionals: Consider seeking advice from accountants or financial advisors familiar with current Australian standards.

As financial reporting standards continue to evolve, the percentage of completion method remains a valuable tool for Australian businesses managing long-term projects. By aligning revenue recognition with actual progress, businesses can provide stakeholders with a transparent and accurate view of performance, support better financial management, and meet regulatory requirements.

Businesses that effectively implement the POC method in 2026 will be well-placed to demonstrate trustworthiness and reliability, both to regulators and to clients. Careful planning, accurate tracking, and ongoing compliance will help ensure that the benefits of the POC method are fully realised.