4 Key Benefits for Smarter Construction Accounting
In the construction industry, choosing the right accounting approach is key. The Percentage of Completion Method (PCM) is one of the most reliable and widely used methods for managing the financial reporting of long-term or multi-year projects. As trusted financial advisors in San Antonio, we’ve outlined four advantages of PCM to help you decide if it’s the best fit for your business.
What is The Percentage of Completion Method?
Project-level PCM enables companies to recognize revenue and expenses incrementally as work is completed, creating a direct link between financial reporting and actual project progress. It is particularly valuable because overhead costs, including staffing and supplies, can fluctuate significantly throughout a project’s lifecycle.
This form of accounting allows construction owners or contractors to report financial results in real-time, as work is completed, rather than waiting until the entire project’s completion. It creates a more accurate picture of a company’s financial health by matching revenue and costs to the month in which they were earned/incurred.
1. PCM Aligns Revenue with Work Completed
Streamlined financial reporting can prevent sudden revenue spikes or drops that would occur if companies reported income only when contractors complete projects, providing a more reliable view of ongoing performance.
Example: If a $10 million project is 50% complete by the end of the year, 50% of the project’s revenue ($5 million) can be considered earned.
2. Reduces Volatility in Profit & Loss Statements
PCM ensures that financial results align with work completed during a given reporting period, smoothing out project-based finances’ often volatile nature and preventing large monthly fluctuations in profit and loss (P&L).
Imagine a scenario without PCM. A company undertakes a large project that is expected to last several months. With only traditional accounting methods, revenue would not be accounted for until the end of the project, creating misleading financial statements and potential instability. Incurred expenses would have to be regularly tracked, leading to apparent losses.
Those implementing the PCM approach strengthen their company’s market position and ability to achieve its strategic objectives and provide a more stable and predictable financial picture.
3. Complies with Industry Standards & GAAP
Trusted by the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS), this structured framework supports ASC 606 compliance by providing detailed cost tracking, accurate progress measurement, reduced audit risks, and easier tax filings. Implementing it allows for the following:
- Precise revenue and expense reporting
- Proper forecasting and resource allocation
- Transparency and accountability
4. Enhances Investor & Stakeholder Confidence
This is one of the most critical aspects of the business. Maintaining investor and stakeholder relationships is no easy feat when multi-million dollar projects are involved.
PCM helps construction companies build trust and credibility with their financial partners by providing consistent, predictable reporting. Instead of showing erratic profit patterns, companies using PCM demonstrate steady, transparent financial performance over time.
This stability is particularly valuable when working with investors and lenders, who prefer to see reliable, well-managed operations. The predictable nature of reporting makes it easier for construction companies to:
- Secure new funding and maintain existing credit lines
- Negotiate favorable contract terms
- Manage cash flow effectively
- Build lasting relationships with business partners
It signals financial responsibility and strong management practices, strengthening one’s reputation in the community.
Next Step: Reach Out To An Accountant
Are you wondering if PCM is the best approach for your construction business in Texas? Our experienced accounting professionals can help you decide. Implementing and maintaining this method of accounting involves the creation of work-in-process schedules, completed contract schedules, and over/under billing calculations–all items that we can help you with at Badger CPA.
Contact us to learn more about our construction accounting services.