Legal Definitions - percentage-of-completion method

The percentage-of-completion method is an accounting method used to determine revenue recognition gradually during the completion of a contract. This means that revenue is recognized as the work progresses, rather than waiting until the project is complete.

Let's say a construction company is building a new office building for a client. The total contract price is $10 million, and the project is expected to take two years to complete. After the first year, the company has completed 50% of the project, and the client has paid $4 million. Using the percentage-of-completion method, the company would recognize $5 million in revenue for the first year (50% of the total contract price), even though they have only received $4 million in payment.

This method is used to provide a more accurate representation of a company's financial performance over time, rather than waiting until the end of a project to recognize all revenue at once.