Percentage of completion method: A construction guide

By

Josh Krissansen

Last Updated May 7, 2026

By

Josh Krissansen

Percentage of completion (POC) is an accounting method that recognises revenue and costs based on the proportion of work completed to date. Its accuracy determines whether financial reporting reflects what is actually happening on site.

When POC is applied poorly, revenue, margin, and cash position can be misrepresented, creating risk exposure across ATO compliance, lender reporting, and internal decision-making. When applied correctly, POC gives project managers and stakeholders a clear, reliable view of where each project stands.

In this article, we explain how the percentage of completion method works in Australian construction, how to calculate it, and how it connects to WIP, progress claims, and AASB 15 requirements to support more accurate reporting and financial control.

What is the percentage of completion method?

The percentage of completion method determines how revenue is recognised on long-term construction projects.

Percentage of completion is a method of accounting for long-term construction contracts in which revenue and costs are recognised based on the proportion of work completed during each reporting period. This means a head contractor recognises project revenue and expenses as the project progresses, typically on a monthly basis, rather than waiting until practical completion.

AASB 15, the Australian accounting standard that governs how and when revenue is recognised on contracts with clients, stipulates that this approach applies when a contract meets at least one of three criteria for over-time revenue recognition:

1. The client receives and consumes the benefits of the head contractor's performance as the work is carried out
2. The client controls the asset as it is created or enhanced
3. The head contractor has an enforceable right to payment for performance completed to date

Where none of the three criteria is met, point-in-time recognition applies, with practical completion typically being the specific point at which revenue is recognised. Under AASB 15, this is the default outcome when a contract does not qualify for over-time revenue recognition, rather than being chosen by the head contractor.

How POC is usually applied in Australia

In practice, this is why most long-term construction contracts in Australia recognise revenue progressively rather than at completion.

How to calculate the percentage of completion

Calculating POC requires selecting a method that accurately reflects how work is delivered to the client. This is done by measuring progress toward complete satisfaction of a performance obligation.

There are two broad approaches:

1. Input methods, such as the cost-to-cost method, which measure progress based on costs incurred or labour hours expended.
2. Output methods, such as the units-of-delivery method, which measure progress based on units delivered or milestones achieved.

The cost-to-cost method is the most common approach because costs are the most universally available data point across every project type. Labour, materials, subcontractor invoices, and equipment are already tracked in your accounting system, regardless of the trade or delivery model you're using.

However, cost-to-cost can distort progress when costs are front-loaded, uneven, or don't map cleanly to work actually transferred to the client. In these cases, alternative methods such as efforts-expended or units-of-delivery may be more appropriate.

Whichever method you choose, it's important that it is applied consistently across reporting periods and reflects the transfer of work to the client.

The cost-to-cost method

The cost-to-cost method measures project progress by tracking what proportion of total estimated costs have been incurred to date.

That proportion becomes the percentage of completion, which is then applied to the contract price to determine how much revenue can be recognised in the period.

This results in two formulas:

1. Percentage complete = (Costs incurred to date ÷ Total estimated costs) x 100
2. Revenue recognised = Percentage complete x Total contract price

Here’s an example:

A head contractor is delivering a $50M commercial project in Melbourne with total estimated costs of $40M.

At the end of Month 6, $12M in actual costs have been incurred across labour, materials, and subcontractor invoices, putting the project at 30% complete ($12M ÷ $40M x 100). This means that recognised revenue for the period is $15M ($50M x 30%).

Total estimated costs must be updated as the project develops. Variations, cost escalations, and productivity changes all affect the denominator. 

If a variation is approved on the above project, increasing total estimated costs to $42M, the POC must be recalculated as follows: ($12M ÷ $42M x 100 = 28.6%), and the adjustment to recognised revenue must be recorded in the current period.

The efforts-expended method

The efforts-expended method measures progress using labour hours or machine hours rather than costs. It follows the same logic as cost-to-cost but substitutes hours for dollars, making it more appropriate for labour-intensive trades where hours worked are a more reliable indicator of progress than costs incurred.

This method follows the same calculation structure, but replaces costs with labour or machine hours.

1. Percentage complete = (Efforts to date ÷ Total estimated efforts) × 100
2. Revenue recognised = Percentage complete × Total contract price

"Efforts" typically refers to labour hours logged against the project.

For example, an electrical contractor in Sydney estimates 5,000 labour hours to complete a $1M fitout. After logging 2,000 hours, the project is 40% complete (2,000 ÷ 5,000 × 100), and $400,000 in revenue is recognised ($1M × 40%).

Total estimated efforts must be updated as productivity, scope, or variations change, as an outdated denominator produces a percentage that no longer reflects actual progress.

The units-of-delivery method

The units-of-delivery method measures progress based on completed output units rather than costs or hours. 

1. Percentage complete = (Units delivered ÷ Total units) × 100
2. Revenue recognised = Percentage complete × Total contract price

For example, a developer building 40 townhouses in Brisbane has completed 10 units. The project is 25% complete (10 ÷ 40 × 100), so 25% of the total contract revenue can be recognised for the period.

The units used in this calculation must represent genuinely distinct and measurable outputs, such as completed dwellings, certified road segments, or connected utility services. Partially completed units do not count, as progress is only recognised when a unit meets the definition of delivered under the contract.

This method is best suited to repetitive or staged construction projects where progress is easily measured through distinct, completed deliverables.

Where this shows up in real life: How POC ties into WIP and progress claims in Australia

POC must reconcile with two key processes happening simultaneously on every project:

1. The Work in Progress (WIP) report: the internal monthly financial control tool
2. The progress claim cycle: how cash actually moves between the principal and head contractor.

The POC calculation sits at the centre of the WIP report. It drives recognised revenue each month, meaning any drift in site progress, cost capture, or billing flows directly into the POC calculation before it appears elsewhere.

When those inputs fall out of sync, the POC calculation starts to misrepresent where the job stands. This misalignment is a routine cash flow issue in commercial construction.

Consider a head contractor delivering a $40M project in Queensland who has incurred $12M in costs against a revised forecast of $36M, putting the job at approximately 33% complete. 

The contractor should have billed for $13.2M by this point (33% of the total project value), but progress claims total $10.5M because a key milestone has not yet been certified. As a result, the monthly WIP report shows $2.7M underbilled, meaning costs and site progress are running ahead of what has been claimed.

Of the $10.5M claimed, the principal is holding 5% ($525k) as retention under the contract. The result is $2.7M in work performed but not yet claimed, plus $525k locked in retention, putting more than $3.2M of completed work outside the contractor's control.

This gap may not appear on the income statement, but it still impacts cash flow and balance sheet exposure.

The WIP report is what makes that gap visible, linking cost-to-date, revised forecast, percent complete, and billing position in one place. It is the earliest signal that the accounting position is losing touch with site reality.

Percentage of completion risks and how to reduce them

Because POC relies on internal inputs, it introduces a key risk:

Financial reporting can drift from actual site progress.

When recognised revenue and expenses no longer reflect actual progress, billing, or costs, the consequences show up in cash flow before they show up anywhere else. AASB 15 is clear on this point, stating that progress measures must depict the actual transfer of control to the client.

That misalignment typically enters through three points:

1. Billing positions that do not align with recognised revenue
2. Variations that are approved on site but not yet entered into the forecast
3. The absence of controls that would catch either problem before they compound.

• Overbilling and underbilling

  Overbilling occurs when the amount claimed to date exceeds the revenue that POC says should be recognised. Underbilling is the reverse: the amount claimed is less than recognised revenue.
  
  Neither position is risk-free. A contractor that consistently overbills will struggle to cover remaining costs as the project progresses, while one that persistently underbills will experience cash flow problems and likely face a growing gap between work performed and money received.
  
  Both are recorded as journal entries in the general ledger.
  
  Overbilling creates a liability on the balance sheet, reflecting the obligation to perform work already paid for. Underbilling creates an asset, representing work completed but not yet billed. 
  
  These entries adjust the revenue recognised on the income statement to ensure it reflects the POC calculation rather than the billing position alone. Keeping these entries current each reporting period helps prevent a timing difference from becoming a financial control problem.
  
  

• Variations

  A variation is any approved change to the contracted scope, and each one affects two things simultaneously: the total contract value and the total estimated costs. Both are inputs to the POC calculation, so an unrecorded variation distorts the percentage complete and the revenue recognised in that period.
  
  A variation sitting outside the forecast, even temporarily, means the POC calculation is working from incorrect inputs. Approved variations should be entered into the system immediately. This updates the contract value and cost forecast, keeps the POC percentage current, and ensures that recognised revenue remains accurate.
  
  Delaying entry, even by a reporting period, means prior periods are already misstated by the time the correction is made.
  

• Controls that keep POC reliable 

  The inputs that drive the POC calculation, cost capture, progress assessment, and variation status come from the site, the commercial team, and finance. Keeping those inputs aligned requires structured processes across teams.
  
  Three controls keep POC reliable in practice:
  
  1. Run monthly forecast reviews across project management, commercial, and finance teams. The cost-to-complete forecast requires input from the project manager on programme, the commercial manager on variations and subcontract exposure, and finance on cost codes and commitments. Bringing these together keeps the forecast current and the POC calculation grounded in site reality.
  
  2. Document your approach to variations. Approved variations update the contract value and cost forecast immediately. Pending variations are tracked separately with a consistent policy on how they are reflected in the forecast until approved. Ad hoc variation treatment is one of the most common causes of POC drift.
  
  3. Maintain an evidence pack on every project. Progress photos, site diaries, delivery dockets, and subcontractor claims support both the POC calculation and payment claim integrity under the Security of Payment legislation. Keeping that pack current is what makes the POC position auditable and the progress claim hard to dispute.

Percentage of completion supports accurate financial control

The percentage of completion method connects project progress, revenue recognition, and cash flow visibility across construction projects in Australia. Applied consistently, with accurate inputs and aligned processes, it provides a reliable view of project performance.

Written by

Josh Krissansen

76 articles

Josh Krissansen is a freelance writer with two years of experience contributing to Procore's educational library. He specialises in transforming complex construction concepts into clear, actionable insights for professionals in the industry.

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