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Understanding Progress Billing and Percentage of Completion Billing

The Percentage of Completion (AKA: Progress Billing) is an accounting method where revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period.

Percentage of Completion is used by HVAC, plumbing, electrical, field service, construction, and other contracting companies. Progress Billing helps improve the accuracy of their income statements, balance sheets, and job costing reports. It may also help contractors improve their cashflow by getting out invoices faster.

Frequently Asked Questions About Percentage of Completion

These are the most asked questions we get on the topic of Percentage of Completion Billing.

Question: What is Percentage of Completion Billing?

Answer: The Percentage of Completion (AKA: Progress Billing or Progress Invoicing) method is an accounting method commonly used by contractors, construction companies, and field service businesses who perform equipment replacements and installation.

Question: Who uses Percentage of Completion Billing or what type of business uses Percentage of Completion?

Answer: The Percentage of Completion or Progress Billing accounting method is commonly used by contractors, contracting businesses, construction companies, and field service businesses who perform equipment replacements and installation. It is also used in HVAC, plumbing, electrical new construction and on design build jobs.

Question: How do I determine the percentage of completion for a project?

Answer: The percentage of completion is typically calculated based on costs incurred to date divided by total estimated costs or by comparing work completed (e.g., units installed) to total work required.

Question: What are the key differences between Percentage of Completion and Completed Contract methods?

Answer: Percentage of Completion recognizes revenue and expenses progressively as work progresses, while Completed Contract method recognizes revenue and expenses only upon project completion.

Question: How do I handle losses on Percentage of Completion projects?

Answer: If estimated total costs exceed total revenue, the project incurs a loss. This loss should be recognized immediately, reducing the profit recognized to date.

Progress Billing Example in Contracting Accounting

You sell a job for $30,000 and it is going to take thirty days to complete. You are allowed to invoice the customer based on your progress. Typically, the amounts are pre-negotiated and could be part of a Work in Progress (WIP) schedule. When you have delivered all of the equipment, you might be able to send them an invoice for $7500. When you deliver the fabricated sheet metal, you might be authorized to invoice them for $5,000. When invoices are created, your financial statements and job costing will recognize revenue and cost of goods sold (direct expenses).

Percentage of Completion accounting requires the user to create a detailed Estimate. The more line items the estimate has, the more detailed your percentage of completion and job costing information will be. When you wish to create a progress invoice, you will open that estimate and create a progress invoice. From the Estimate, click Menu | Create | Invoice. Create an invoice for a percent of the total job. This can be done by adjusting quantities, retail prices, or by removing line items from the invoice.

Managing Percentage of Completion in Total Office Manager

There are many ways to track the percentage of completion in Total Office Manager.

  1. Open a Customer:Job and go to its History form. Click on the Estimate tab. You will notice there is information such as Total, Amount Billed, and % Billed.
  2. Click Reports | Contacts & Jobs | Jobs | Progress Billing – Estimate vs. Billed. This report shows you what is on the Estimate and what has been invoiced (billed) to the customer. You will see percentages by line item and more.
  3. Click Reports | Contacts & Jobs | Jobs | Job Estimate Vs. Actuals Summary. This report shows you a summary of what you estimated (based on the estimate) versus what actually happened (based on the invoice).
  4. Click Reports | Contacts & Jobs | Jobs | Job Estimate Vs. Actuals Detailed. This report shows you what you estimated (based on the estimate) versus what actually happened (based on the Invoice). This report shows you a comparison of each and every line item, as opposed to a summary of the entire form.
  5. The optional AIA Billing system is a complete “Percentage of Completion” system. It allows you to view significant details about what was estimated versus invoices as well as what work has been completed versus what was billed (invoiced).

Key Software Features to Use

  1. Always create a “Job”.
  2. Take advantage of the Departmentalization features.
  3. Create highly detailed estimates.
  4. Create purchase orders, work orders, and pick tickets, from estimates.
  5. Create invoices from estimates (for the total amount, WIP, or progress).
  6. Use the History form for that Job to view quick facts and detailed information.
  7. Use These Reports (there are others).
    1. Progress Billing – Estimate vs. Billed
    2. Job Estimate Vs. Actuals Summary
    3. Job Estimate Vs. Actuals Detailed
    4. Estimate Over\Under Details (This is a customizable “Custom Data View”)
  8. Use the AIA Billing System if required.
  9. Consider using the Inventory Transfer feature.
  10. Use adjusting journal entries (if needed).

Managing Percentage of Completion in QuickBooks

To manage Percentage of Completion in QuickBooks Enterprise for progress billing on a construction job, follow these steps:

Set Up the Estimate

  1. Create an estimate for the entire job in QuickBooks Enterprise.
  2. Go to the Customers menu > Estimates/Create Estimates.
  3. Enter all job details including phases or stages if applicable.

Enable Progress Invoicing

  1. Ensure progress invoicing is enabled in QuickBooks Enterprise.
  2. Go to Edit > Preferences > Jobs & Estimates > Company Preferences tab.
  3. Check “Yes” for Progress Invoicing.

Create Progress Invoices

  1. Periodically create progress invoices based on the percentage of completion.
  2. Go to Customers menu > Create Progress Invoices.
  3. Select the customer/job and set the date and invoice number.
  4. Enter the percentage of completion for each line item or phase.
  5. Review and save the progress invoice.

Recognize Revenue

  1. QuickBooks Enterprise automatically recognizes revenue based on the percentage of completion method.
  2. The revenue and associated costs are recognized as the progress invoices are entered.

Adjusting Journal Entry (If needed)

Depending on your accounting practices, you may need to make adjusting journal entries at period-end to ensure accuracy.

Consult with an accountant or accounting firm that specializes in accounting for contracting companies. RA Tax and Accounting is an example of an accounting and tax preparation company that specializing in QuickBooks and Total Office Manager.  to determine if adjustments are necessary based on specific project circumstances.

Monitor Job Profitability

  1. Regularly review job profitability reports in QuickBooks Enterprise to track actual versus estimated costs and revenue.
  2. Customize reports under Reports > Jobs, Time & Mileage to view job profitability and progress.

By following these steps, you can effectively manage Percentage of Completion for construction jobs in QuickBooks Enterprise, ensuring accurate billing and financial reporting. Adjustments or further customization may be required based on specific project needs and accounting practices.

Additional Information – Percentage of Completion

Billed versus Invoiced

You may have noticed that our documentation sometimes seems to use the words “billed” and “invoiced” interchangeably. When you send a customer an invoice, they have received a bill from you. That’s how they may word it. You a vendor creates an invoice; you consider it a bill that must be paid. They consider it an invoice that needs to be collected.

Revenue Recognition Guidance under FASB

Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, on May 28, 2014. The new revenue recognition standard in ASU 2014-09 is primarily codified in FASB Accounting Standards Codification 606, and the effective date for nonpublic entities was for years beginning after December 15, 2018. The new guidance introduces a five-step model for recognizing revenue, and it requires entities to first identify the performance obligations in the contract and then allocate the transaction price to each one. Consequently, percentage of completion is applied to a performance obligation rather than a contract price.

In addition, the new revenue guidance also introduces the concept of “transfer of control” to determine when the revenue should be recognized—either at a “point in time” or “over time.” If certain conditions are met, revenue should be recognized over time, which is similar to using the percentage-of-completion method.

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