Completed Contract Method

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Overview of the Completed Contract Method

Under the completed contract method, you should only recognize income when a contract is substantially complete (though you should recognize expected losses as soon as you are aware of them). You should consider a contract to be complete when the remaining costs and potential risks are insignificant.

Prior to recognition, you should accumulate all billings and costs on the balance sheet. If there is an excess of accumulated costs over related billings, then report the excess on the balance sheet as a current asset. If there is an excess of accumulated billings over related costs, then report the excess on the balance sheet as (in most cases) a current liability

The completed contract method is most appropriate when there are minimal dependable estimates upon which to use the percentage-of-completion method. It also yields results similar to those of the percentage-of-completion method for very short-term contracts.

Example of the Completed Contract Method

Hephaestus Construction is building a research facility for a not-for-profit entity whose cash flows are entirely based on donations, and so are highly uncertain. Given the level of uncertainty, Hephaestus elects to use the completed contract method to recognize revenues and expenses under the contract. During the project, Hephaestus gradually incurs $320,000 of costs, which it records as an asset on its balance sheet. Once the project is completed, Hephaestus bills the customer $380,000 and recognizes the entire $320,000 of costs as expense, resulting in a $60,000 profit.