The Percentage of Completion method made smart

by House of Control | Dec 20, 2022 1:25:38 PM

The Percentage of Completion (PoC) is a way of accounting for long-term projects, most commonly in the construction industry. A new solution helps the finance department increase both speed and quality when using PoC in their financial planning process.

What is the Percentage of Completion method? With PoC, revenues and expenses of long-term contracts ​are recognized as a percentage of the work completed during the period, rather than recognizing all the revenue when the project is completed. The method aims to distribute a valid profit over time independent of cash flow​. While PoC is common in the construction industry, it is also used by companies in other sectors with long-term contracts.

The method is useful because it allows a company to recognize revenue as the work on a project progress, rather than having to wait until the project is completed. This can provide a more accurate picture of a company's financial performance and can also help to smooth out fluctuations in revenue recognition. Additionally, the use of this method is generally accepted by regulators and is in accordance with generally accepted accounting principles (GAAP).

Example:

A project with mEUR 13 in revenue. mEUR 3 is received on the signing date, while mEUR 10 is received on the completion date. mEUR 10 in costs (cash out) are distributed over time as purchases are made. mEUR 3 in profit is distributed over time based on completion rate.

PoC 1-1

There are different ways of recognizing costs and revenue:

  • Cost-to-cost method​: Compares the costs incurred to date with estimated total expected costs of a project​.
  • ​Efforts-expended method​: Compares the effort, i.e. machine hours, expended to date with estimated total effort​. ​
  • Units-of-delivery method​: Compares the number of units, i.e. homes, finished to date with estimated total number of units.

There are also different ways of forecasting PoC:

PoC 2

How to solve PoC accounting in practice? Effectplan at House of Control Group has developed a new solution to make financial planning for PoC fast and easy. And one of Norwegian’s largest construction companies is already using it.

The new Effectplan PoC solution has several benefits, including:

  • Giving users system support when forecasting Percentage of Completion​
  • Improved efficiency and forecast accuracy​
  • Improved decentralization of forecasting assignments​
  • Improved consolidation of forecasted amounts​
  • Improved maintenance and data integrity

Relevant solution: Effectplan - click here to ask read more and ask for a demo

Percentage of Completion

 

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