Revenue Recognition in Construction Finance
Revenue Recognition in Construction Finance
Revenue recognition is not just an accounting requirement for construction companies. It is the lens through which profitability, risk, and cash flow are measured. When revenue is recorded correctly, it builds trust with lenders, owners, and investors. When it is not, it creates distortions that can erode margins and damage credibility.
Unlike other industries, construction revenue recognition is uniquely complex. Projects stretch over many months or years, and performance obligations often change midstream with scope revisions and change orders. That is why construction operates under ASC 606, the standard that requires companies to recognize revenue as performance obligations are satisfied. For accountants, this means precision and compliance. For project managers and executives, it means making sure the financial picture matches what is happening on site.
Let’s break down the main methods, where companies often stumble, and what is coming next for revenue recognition in construction.
Revenue recognition is not just an accounting requirement for construction companies. It is the lens through which profitability, risk, and cash flow are measured. When revenue is recorded correctly, it builds trust with lenders, owners, and investors. When it is not, it creates distortions that can erode margins and damage credibility.
Unlike other industries, construction revenue recognition is uniquely complex. Projects stretch over many months or years, and performance obligations often change midstream with scope revisions and change orders. That is why construction operates under ASC 606, the standard that requires companies to recognize revenue as performance obligations are satisfied. For accountants, this means precision and compliance. For project managers and executives, it means making sure the financial picture matches what is happening on site.
Let’s break down the main methods, where companies often stumble, and what is coming next for revenue recognition in construction.
I. The Accrual Basis Reality
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash is collected or paid.
Real Example: A subcontractor completes foundation work in September and invoices the general contractor for $200,000. The check will not arrive until November, but under accrual accounting, that revenue is booked in September when the work was performed.
Why it works: Accrual gives a more accurate snapshot of profitability during the life of a project.
Where it goes wrong: Many contractors forget that profitability on paper does not equal cash in the bank. A company can show strong margins while scrambling to meet payroll if receivables lag.
Best practice: Pair accrual accounting with active cash flow monitoring and strict tracking of retainage. Automation can help ensure transactions are captured and matched accurately. Platforms like Speedchain can strengthen this process by giving real-time visibility into project expenses through automated credit card tracking and coding.
I. The Accrual Basis Reality
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash is collected or paid.
Real Example: A subcontractor completes foundation work in September and invoices the general contractor for $200,000. The check will not arrive until November, but under accrual accounting, that revenue is booked in September when the work was performed.
Why it works: Accrual gives a more accurate snapshot of profitability during the life of a project.
Where it goes wrong: Many contractors forget that profitability on paper does not equal cash in the bank. A company can show strong margins while scrambling to meet payroll if receivables lag.
Best practice: Pair accrual accounting with active cash flow monitoring and strict tracking of retainage. Automation can help ensure transactions are captured and matched accurately. Platforms like Speedchain can strengthen this process by giving real-time visibility into project expenses through automated credit card tracking and coding.
II. The Percentage-of-Completion Method
Percentage-of-completion (POC) is the most widely used method for long-term construction projects. Revenue is recognized in proportion to the work completed, typically measured through cost-to-cost calculations.
Real Example: A highway contractor signs a $10 million contract. Halfway through the year, $4 million of costs have been incurred against an $8 million total estimate. The project is 50 percent complete, so $5 million of revenue is recognized.
Why it works: POC aligns revenue with actual progress, creating financial statements that mirror what is happening in the field.
Where it goes wrong: Inaccurate or outdated cost estimates. If steel prices rise 20 percent and estimates are not updated, financial statements will overstate profitability until late in the project when the correction hits all at once.
Best practice: Update cost forecasts monthly and only include fabricated or contract-specific materials in progress calculations. Align billing with recognized revenue to prevent overbillings and underbillings. Tools like Speedchain’s finance automation make this easier by tagging spend directly to job cost codes, ensuring field purchases immediately reflect in financial reporting.
II. The Percentage-of-Completion Method
Percentage-of-completion (POC) is the most widely used method for long-term construction projects. Revenue is recognized in proportion to the work completed, typically measured through cost-to-cost calculations.
Real Example: A highway contractor signs a $10 million contract. Halfway through the year, $4 million of costs have been incurred against an $8 million total estimate. The project is 50 percent complete, so $5 million of revenue is recognized.
Why it works: POC aligns revenue with actual progress, creating financial statements that mirror what is happening in the field.
Where it goes wrong: Inaccurate or outdated cost estimates. If steel prices rise 20 percent and estimates are not updated, financial statements will overstate profitability until late in the project when the correction hits all at once.
Best practice: Update cost forecasts monthly and only include fabricated or contract-specific materials in progress calculations. Align billing with recognized revenue to prevent overbillings and underbillings. Tools like Speedchain’s finance automation make this easier by tagging spend directly to job cost codes, ensuring field purchases immediately reflect in financial reporting.
III. The Completed Contract Method
The completed contract method defers all revenue and expenses until the project is substantially finished.
Real Example: A residential builder signs a $500,000 contract to build a custom home. No revenue is recognized until the project is complete nine months later, when the entire $500,000 hits the books.
Why it works: This method is simple and can be effective for smaller, short-duration projects where POC tracking is impractical.
Where it goes wrong: Completed contract creates lumpy earnings and can hide losses until the end. If costs balloon mid-project, the financial impact is invisible until delivery.
Best practice: Track project progress carefully even if revenue is deferred. Communicate with stakeholders about the volatility that comes with recognizing revenue all at once. Using project-level spending controls, such as Speedchain’s real-time spend reporting and spend rules, can prevent cost surprises that often pile up unnoticed until closeout.
III. The Completed Contract Method
The completed contract method defers all revenue and expenses until the project is substantially finished.
Real Example: A residential builder signs a $500,000 contract to build a custom home. No revenue is recognized until the project is complete nine months later, when the entire $500,000 hits the books.
Why it works: This method is simple and can be effective for smaller, short-duration projects where POC tracking is impractical.
Where it goes wrong: Completed contract creates lumpy earnings and can hide losses until the end. If costs balloon mid-project, the financial impact is invisible until delivery.
Best practice: Track project progress carefully even if revenue is deferred. Communicate with stakeholders about the volatility that comes with recognizing revenue all at once. Using project-level spending controls, such as Speedchain’s real-time spend reporting and spend rules, can prevent cost surprises that often pile up unnoticed until closeout.
IV. ASC 606 in Construction
ASC 606 establishes a five-step framework:
Identify the contract.
Identify performance obligations
Determine the transaction price.
Allocate the price to obligations.
Recognize revenue as obligations are satisfied.
Real Example: A general contractor signs an $8 million contract to build a school. The HVAC and plumbing installations are separate performance obligations. The $8 million is allocated accordingly, and revenue is recognized as each obligation is completed. If HVAC is 40 percent done, 40 percent of its allocated revenue is recorded.
For accountants, the benefit of ASC 606 is consistency. For non-accountants, the takeaway is simple: revenue is recognized when real work is performed, not when it is invoiced or collected.
V. Common Pitfalls
One of the biggest pitfalls in revenue recognition is failing to update cost estimates as projects evolve. A contractor may start with a $5 million budget, but if material costs increase or delays extend labor, the original forecast quickly becomes outdated. Without frequent recalibration, financial statements will show inflated profits early in the project, only for those profits to fade later.
Another common issue is weak communication between finance teams and project managers. For example, a project manager may approve a $500,000 change order, but if accounting never receives that update, revenue recognition will be understated and billing may fall behind. This not only distorts financial reporting but can also choke cash flow.
Including uninstalled materials in percentage-of-completion calculations is another trap. Suppose a contractor orders $1 million worth of HVAC equipment and books it as progress, even though it sits in storage. This artificially inflates completion percentages and overstates revenue, creating a gap between financials and actual field work.
Finally, inadequate documentation remains a recurring problem. Revenue recognition is heavily scrutinized by auditors and regulators. If assumptions around progress, cost forecasts, or retainage are not documented, a contractor could face costly disputes or failed audits.
VI. Best Practices for Controllers
To avoid these pitfalls, controllers should invest in systems that link the field to finance. For example, a project management platform integrated with accounting software ensures that when a superintendent updates progress or approves a purchase, those details flow directly into financial reporting. This reduces the risk of mismatches between project status and recognized revenue.
Training is equally important. Project managers and site leaders may not think of themselves as part of the accounting process, but their updates drive the numbers. Educating them on how progress reports and change orders affect revenue recognition creates a culture of accountability across teams.
Establishing standardized policies is another best practice. Clear rules for handling retainage, fabricated materials, and change orders help ensure consistency. For example, a policy might require that fabricated steel beams are only included in progress calculations once they are delivered and installed on-site.
Regular audits of work-in-progress schedules are also critical. A monthly WIP review allows controllers to catch discrepancies early, rather than waiting until year-end. Imagine catching a $1 million overbilling issue in September rather than December—that early detection could mean the difference between smooth cash flow and a financing scramble.
Finally, leveraging tools like Speedchain can give firms a competitive edge. By automating expense tracking and linking job costs directly to credit cards and cost codes, Speedchain ensures that field purchases are reflected in real time. This kind of automation reduces manual entry errors and provides controllers with the transparency needed to reconcile costs with recognized revenue.
VII. What’s Next
Revenue recognition in construction is moving toward greater transparency, automation, and strategic insight.
Technology and AI are reducing manual work in work-in-progress schedules and progress billing. Banks, sureties, and project owners are demanding more timely reporting to validate project health. Tax rules are being tightened to align more closely with ASC 606, which will require firms to harmonize book and tax treatments.
Perhaps most importantly, the role of the controller is expanding. Controllers are no longer just compliance officers. They are strategic partners who translate what is happening on the jobsite into a financial story leadership can act on. Tools like Speedchain are helping accelerate this shift by making financial data more real-time and actionable, freeing controllers to focus less on chasing receipts and more on advising leadership.
The Bottom Line
Revenue recognition in construction is about more than compliance. It is about ensuring the financials reflect the reality of the work your company is doing. By understanding the methods, avoiding common pitfalls, and investing in systems and training, construction firms can protect margins, strengthen cash flow, and build trust with stakeholders.
In 2025, accurate revenue recognition is not just an accounting challenge. It is a strategic advantage, and platforms like Speedchain make it easier by giving construction companies visibility into every dollar spent at the project level.
IV. ASC 606 in Construction
ASC 606 establishes a five-step framework:
Identify the contract.
Identify performance obligations
Determine the transaction price.
Allocate the price to obligations.
Recognize revenue as obligations are satisfied.
Real Example: A general contractor signs an $8 million contract to build a school. The HVAC and plumbing installations are separate performance obligations. The $8 million is allocated accordingly, and revenue is recognized as each obligation is completed. If HVAC is 40 percent done, 40 percent of its allocated revenue is recorded.
For accountants, the benefit of ASC 606 is consistency. For non-accountants, the takeaway is simple: revenue is recognized when real work is performed, not when it is invoiced or collected.
V. Common Pitfalls
One of the biggest pitfalls in revenue recognition is failing to update cost estimates as projects evolve. A contractor may start with a $5 million budget, but if material costs increase or delays extend labor, the original forecast quickly becomes outdated. Without frequent recalibration, financial statements will show inflated profits early in the project, only for those profits to fade later.
Another common issue is weak communication between finance teams and project managers. For example, a project manager may approve a $500,000 change order, but if accounting never receives that update, revenue recognition will be understated and billing may fall behind. This not only distorts financial reporting but can also choke cash flow.
Including uninstalled materials in percentage-of-completion calculations is another trap. Suppose a contractor orders $1 million worth of HVAC equipment and books it as progress, even though it sits in storage. This artificially inflates completion percentages and overstates revenue, creating a gap between financials and actual field work.
Finally, inadequate documentation remains a recurring problem. Revenue recognition is heavily scrutinized by auditors and regulators. If assumptions around progress, cost forecasts, or retainage are not documented, a contractor could face costly disputes or failed audits.
VI. Best Practices for Controllers
To avoid these pitfalls, controllers should invest in systems that link the field to finance. For example, a project management platform integrated with accounting software ensures that when a superintendent updates progress or approves a purchase, those details flow directly into financial reporting. This reduces the risk of mismatches between project status and recognized revenue.
Training is equally important. Project managers and site leaders may not think of themselves as part of the accounting process, but their updates drive the numbers. Educating them on how progress reports and change orders affect revenue recognition creates a culture of accountability across teams.
Establishing standardized policies is another best practice. Clear rules for handling retainage, fabricated materials, and change orders help ensure consistency. For example, a policy might require that fabricated steel beams are only included in progress calculations once they are delivered and installed on-site.
Regular audits of work-in-progress schedules are also critical. A monthly WIP review allows controllers to catch discrepancies early, rather than waiting until year-end. Imagine catching a $1 million overbilling issue in September rather than December—that early detection could mean the difference between smooth cash flow and a financing scramble.
Finally, leveraging tools like Speedchain can give firms a competitive edge. By automating expense tracking and linking job costs directly to credit cards and cost codes, Speedchain ensures that field purchases are reflected in real time. This kind of automation reduces manual entry errors and provides controllers with the transparency needed to reconcile costs with recognized revenue.
VII. What’s Next
Revenue recognition in construction is moving toward greater transparency, automation, and strategic insight.
Technology and AI are reducing manual work in work-in-progress schedules and progress billing. Banks, sureties, and project owners are demanding more timely reporting to validate project health. Tax rules are being tightened to align more closely with ASC 606, which will require firms to harmonize book and tax treatments.
Perhaps most importantly, the role of the controller is expanding. Controllers are no longer just compliance officers. They are strategic partners who translate what is happening on the jobsite into a financial story leadership can act on. Tools like Speedchain are helping accelerate this shift by making financial data more real-time and actionable, freeing controllers to focus less on chasing receipts and more on advising leadership.
The Bottom Line
Revenue recognition in construction is about more than compliance. It is about ensuring the financials reflect the reality of the work your company is doing. By understanding the methods, avoiding common pitfalls, and investing in systems and training, construction firms can protect margins, strengthen cash flow, and build trust with stakeholders.
In 2025, accurate revenue recognition is not just an accounting challenge. It is a strategic advantage, and platforms like Speedchain make it easier by giving construction companies visibility into every dollar spent at the project level.
