Before You Start

This guide assumes a strong understanding of accrual accounting, job costing principles, and access to project budget vs. actual data.

Overview

60 min
Setup Time
Expert
Difficulty
Quarterly
Maintenance

What You’ll Learn

  • How to apply PCM for accurate revenue recognition
  • Calculating project progress and earned revenue
  • Creating and managing Work-in-Progress (WIP) schedules
  • Ensuring GAAP and ASC 606 compliance

1. Understanding PCM Fundamentals

Before diving into calculations, grasp these core PCM components and necessary documents:

Required Concepts

  • Contract Price (Total revenue expected)
  • Estimated Total Cost (Total cost to complete project)
  • Costs Incurred to Date (Actual costs spent so far)
  • Billings (Amounts invoiced to client)

Key Documents

  • Detailed Project Budget
  • Approved Change Orders
  • Project Progress Reports
  • Job Cost Ledgers

2. Choosing Your Method of Measuring Progress

The method chosen to measure progress is critical for accurate revenue recognition.

Method A: Input Method: Cost-to-Cost

This method uses costs incurred relative to total estimated costs to determine progress.

Pros:
  • Widely accepted by auditors.
  • Objective metric for progress.
  • Aligns with cost accrual.
Cons:
  • Assumes linear cost-to-progress.
  • Sensitive to cost estimation errors.
  • Requires robust cost tracking.

Method B: Output Method: Units of Delivery/Milestones

This method uses physical measures or accomplishments to determine progress.

Expert Tip: The key is consistency. Once a method is chosen for a project, stick to it throughout the project lifecycle. Any change requires strong justification and disclosure in financial statements.

3. Step-by-Step: PCM Workflow

Here is the general workflow for implementing PCM for your construction projects.

Here is a sample code block to represent project cost tracking data.

{
  "project_id": "P-2025-001",
  "phase": "Foundation",
  "cost_incurred": 150000,
  "estimated_total_cost": 500000,
  "billings_to_date": 100000,
  "contract_price": 750000
}

4. Calculating & Recognizing Revenue

  1. 1

    Calculate Percentage Complete

    Formula: (Costs Incurred to Date / Estimated Total Cost). Determine the completion ratio based on actual costs relative to total estimated costs.

  2. 2

    Calculate Total Earned Revenue

    Formula: (Percentage Complete * Total Contract Price). Multiply the completion percentage by the total contract price to find revenue earned to date.

  3. 3

    Recognize Current Period Revenue

    Formula: (Total Earned Revenue - Previously Recognized Revenue). Recognize only the additional revenue earned in the current accounting period.

Common Error: Underestimating Costs

Underestimating total project costs can lead to overstated profits in early stages and significant losses later. Regularly re-evaluate cost estimates to maintain accuracy.

5. Monthly/Quarterly Review & Reconciliation

PCM Review Checklist

  • Review actual vs. estimated costs for all projects
  • Update percentage complete based on latest estimates
  • Reconcile WIP (Work-in-Progress) asset and liability accounts
  • Verify recognized revenue matches the earned portion
  • Check for significant changes in project scope or estimates

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Mastering PCM can be complex. Our team of construction accounting experts is here to help you implement and refine your process.

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