Completed Contract Method CCM: Examples in Accounting

You have a construction contract worth $4 million to be completed over 3 years. Your actual costs for the 1st year turned out to be $300,000, which is less than 10% of the total estimated costs, so you did not report income or deduct expenses for that 1st year. However, after contract completion, your actual cost was $2,900,000, so the $300,000 of costs incurred in the 1st year exceeded completed contract method example 10% of the total actual costs. Therefore, you must use the lookback method to calculate the amount of interest to pay, based on what should have been reported minus what actually was reported. Under the percentage of completion method, contractors recognize revenue as they progress on the project. You would recognize $5,000 of revenue under the percentage of completion method.

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Small contractors can use the CCM for contracts related to real property that will be completed in two years or less. Land developers or subcontractors whose situation matches either of these two exceptions are generally allowed to use the Completed Contract Method for accounting purposes. We are a subcontractor and the GC we are working for is asking us to sign and notarize progress payment line waivers for amounts they have not paid us for, is this legal? The Completed Contract Method (CCM) is used when there is uncertainty about getting paid by the customer under the contract terms. It is mainly designed for any business that engages in long-term contracts.

• Because the CCM allows the deferral of taxes, a large contractor must usually choose the PCM, but a small contractor can choose CCM if the estimated life of the contract is 2 years or less.
• One of the main advantages of the completion method is the deferral of taxes.
• Companies that use the CCM must have some sort of accounts to hold these transactions until recognition.
• This is because instead of looking at contract completion, ASC 606 looks at the completion of performance obligations.
• Companies can maintain a conservative financial outlook until costs, payments, and profit are clear at the end of the project.
• The two revenue recognition methods are commonly seen in construction companies, engineering companies, and other businesses that mainly generate revenue on long-term contracts for projects.

The Completed Contract Method of Accounting in Construction

Companies can maintain a conservative financial outlook until costs, payments, and profit are clear at the end of the project. This could impact the company’s financial statements positively or negatively, depending on the sum total of the projects on their statements. For example, if multiple projects are all completed at the same time, there may be a flurry of revenue recognized in that tax year and a large sum of taxes owed on any profit. This can make a construction company look unfavorable to banks when applying for loans since there isn’t a constant stream of income.

What is required of contractors using the completed contract method?

This can improve communication with project owners, GCs, and other stakeholders. It’s like having a trusty GPS system guiding you through the project–you’ll always know where you stand. For another example, we imagine a contract with a total value of $1,000,000, which spans a three year period. Using the following calculations, you can determine revenue to date, cost to date, and the percent of completion at the end of each year. They are then used to assess progress and determine all subsequent payments matching the completed work. But even if you fall under this threshold, most trades are far too complex to get by using the cash basis method.

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It won’t set your company up for long-term growth and will limit the amount of actionable information you can gain from your financial data. So you’ll need to find a strategic way to separately handle cash flow tracking. But don’t get too excited because not everyone can take advantage of cash basis. If you made $26 million or less over the last three tax years, you’re eligible to use cash basis. All the materials needed cost $1,000, and the total contract amount will award you $2,000.

Example of Accounting for Income and Expenses Under CCM

If tax rates are expected to go up, paying a percentage of taxes on a project sooner, via PCM, may be ideal. We have clients who prefer to be settled up with the IRS at all times, and use PCM for that reason alone. Completed contract method is an approach used for construction contract accounting in which the revenue is recognized only when the contract is 100% complete. However, even the completed contract method does not defer recognition of related costs and expenses. The Completed-contract method is an accounting method of work-in-progress evaluation, for recording long-term contracts. GAAP allows another method of revenue recognition for long-term construction contracts, the percentage-of-completion method.

Exempt Percentage of Completion Method

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