Percentage of Completion method forecasted smart
The Percentage of Completion (PoC) is a way of accounting for long-term projects, commonly used in the construction industry. A new solution helps the finance department increase both speed and quality in the budget and forecast process when using PoC in their financial accounting.
What is the Percentage of Completion method?
With PoC, revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period, rather than recognizing all the revenue when the project is completed. The method aims to distribute a valid profit over time independent of cash flow. While PoC is common in the construction industry, it is also used by companies in other sectors with long-term contracts.
The method is useful because it allows a company to recognize revenue as the work on a project progress, rather than having to wait until the project is completed. This can provide a more accurate picture of a company's financial performance and can also help to smooth out fluctuations in revenue recognition. Additionally, the use of this method is generally accepted by regulators and is in accordance with generally accepted accounting principles (GAAP).
Example:
A project with mEUR 13 in revenue. mEUR 3 is received on the signing date, while mEUR 10 is received on the completion date. mEUR 10 in costs (cash out) are distributed over time as purchases are made. mEUR 3 in profit is distributed over time based on completion rate.
Principles for recognizing costs and revenues: (Examples)
- Cost-to-cost method: Compares the costs incurred to date with estimated total expected costs of a project.
- Efforts-expended method: Compares the effort, i.e. machine hours, expended to date with estimated total effort.
- Units-of-delivery method: Compares the number of units, i.e. homes, finished to date with estimated total number of units.
Main principles of forecasting PoC
There are of course several ways of forecasting PoC. Many of the may be categorized into two main principles:
- Even distribution
- Milestone-based distribution
How to solve PoC financial forecasting in practice? Effectplan has developed a new solution to make financial planning fast and easy. One of Norwegian's largest construction companies is already using it.
Effectplan PoC solution benefits
- Giving users system support when forecasting Percentage of Completion
- Enhanced efficiency and forecast accuracy
- Improved decentralization of forecasting assignments
- Improved consolidation of forecasted amounts
- Improved maintenance and data integrity