How does percentage-of-completion revenue recognition work, and when should a company use it instead of recognizing at a point in time?

Revenue recognition over time applies when a customer simultaneously receives and consumes the benefits as the seller performs, or when the seller's performance creates an asset the customer controls, or when the asset has no alternative use and the seller has an enforceable right to payment for work completed.

When to Use Over Time vs. Point in Time

• Over time: Long-term construction contracts, custom manufacturing where the customer owns work-in-progress, ongoing consulting engagements.
• Point in time: Standard product sales, delivery of finished goods where the customer takes control at a specific moment.

Worked Example

Atlas Bridge Construction signs a $5,000,000 contract to build a pedestrian bridge for Riverside City. Estimated total costs are $3,750,000. By year-end, Atlas has incurred $1,500,000 in costs.

What If Costs Increase?

Suppose in Year 2 the total estimated cost rises to $4,500,000 and cumulative costs are $3,150,000. The new percentage is $3,150,000 / $4,500,000 = 70%. Cumulative revenue should be 70% x $5,000,000 = $3,500,000. Since $2,000,000 was recognized in Year 1, Year 2 revenue is $1,500,000 while Year 2 costs are $1,650,000, producing a gross loss of $150,000 for the period.

Expected Loss Contracts

If total estimated costs exceed the contract price at any point, the entire expected loss must be recognized immediately -- not spread over the remaining life. This is a key exam concept.

Exam Tip: The cost-to-cost method (input method) is the most common approach tested. Always compute cumulative revenue first, then subtract prior periods to get current-period revenue.

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