Before You Start
This guide assumes a strong understanding of accrual accounting, job costing principles, and access to project budget vs. actual data.
Overview
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.
- Widely accepted by auditors.
- Objective metric for progress.
- Aligns with cost accrual.
- 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
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
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
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
Need Help?
Get Support
Mastering PCM can be complex. Our team of construction accounting experts is here to help you implement and refine your process.
Contact Us
Books Automator