The Completed-Contract Method for Contracts - dummies

The Completed-Contract Method for Contracts

By Maire Loughran

The completed-contract method (CCM) is easier to account for than the percentage-of-completion method (PCM). Using the CCM, a contracting company doesn’t recognize either revenue or expense transactions relating to the contract until the contract is completely finished. Companies that use the CCM must have some sort of accounts to hold these transactions until recognition.

But, hey, here’s some good news: Companies don’t have new account names to memorize! Businesses use the same two accounts to hold the value of these transactions for CCM as they use for the PCM.

  • Construction in process: This inventory asset account shows accumulated construction costs as of the date of the balance sheet.

  • Billings on construction in process: Use this contra inventory account to accumulate progress billings.

The CCM generally results in the greatest tax deferral, compared to other long-term contract accounting methods, because the general rule is that all contract income and contract-related expenses (both direct and indirect) are deferred until the taxable year in which the contract is completed.

Generally, a company should use the CCM when one of the following conditions exists:

  • The company deals mostly with short-term contracts, which are those that don’t span a year-end.

  • The company doesn’t meet the criteria to use PCM.

  • Inherent risks exist beyond the scope of normal business risks, such as a potential scarcity of a natural resource needed for the project (for example, because of extreme weather conditions).

CCM can be used only for two types of long-term contracts: home construction contracts and any other contract that’s expected to be completed within two years, provided that the company’s average annual gross receipts for the prior three years do not exceed $10 million.