Learn How to Calculate and Use Percentage of Complete (POC): A Complete Guide

What is the percentage of completion (POC)?

Percentage of completion (POC) is a financial accounting metric used to capture the progress of a long-term project or contract. It is a metric used to measure the progress of a project or contract based on the amount of work done divided by the estimated total work that must be completed to complete the job. This is a useful metric for measuring how much revenue to recognize and record as revenue. Companies use the POC to ensure that they capture the right amount of profit and loss associated with contract work.

The POC is calculated by taking the total work remaining to complete the contract and subtracting it from the total work done to date to establish the work remaining to be done. This is then divided by the remaining total cost to determine the percentage of the project complete.

Examples of percentage of completion (POC):

• A company is contracted to build a new office building. To calculate the POC, the company takes the amount of work already completed, such as the amount of raw materials delivered, labor days required, and money spent, subtracts that from the total work required, and divides it by the cost. estimated remainder of the project.
• A software engineering company is contracted to develop a new software package. To calculate the POC, the company takes the number of features built so far, subtracts it from the total number of features needed to complete the job, and divides it by the remaining estimated cost of the project.

It is important to note that POC is an accounting metric and is not the same as budget forecasting. The POC calculation does not take into account potential cost overruns or scope changes. It simply provides a snapshot of the amount of progress made on a project.

In terms of tips and advice on using the POC, it is important to remember that the calculation should be done at least once a month in order to be accurate. When calculating the POC, it is important to include all costs, including direct labor, materials, and overhead. It is also important to understand the difference between the estimated cost and the actual cost associated with each project to ensure the accuracy of the POC calculation.

Key points to remember:

• POC is commonly used for long-term contracts that span a considerable length of time.
• The POC method allows for accurate profit and loss reporting and effective working capital management.
• Always track progress and update estimated costs and completion rate when needed.
• Benefits of POC include accurate revenue and expense recognition, realistic assessment of financial performance, improved cash flow management, and reduced contingencies.

When should a company use percentage of completion (POC)?

Percentage of completion (POC) is an accounting method that is used to record revenue and expenses on long-term contracts. It is commonly used when companies are involved in construction and engineering contracts or similar services that are not easily measured or completed in a short time. For example, a business may record recognized revenue based on its progress in completing a particular construction project.

In order to use POC, a company must have contracts that are spread over a longer period where progress updates can be specifically measured. Companies with long-term projects usually use the POC method to record their finances. It is also used by large companies such as those in the construction and engineering industries, as well as those offering professional services or contract manufacturing services.

The advantage of using the POC is that the company is able to record an accurate profit and loss statement that reflects its financial performance on the project. Moreover, it allows the company to manage its working capital more efficiently and reduce the likelihood of accounts payable and liabilities.

When using the POC method, companies should always track their progress and record changes in the estimated cost/completion rate for the project. This enables accurate financial reporting and enables more accurate forecasting of future profits and expenses.

• POC is commonly used for long-term contracts that span a considerable length of time.
• The POC method allows for accurate profit and loss reporting and effective working capital management.
• Always track progress and update estimated costs and completion rate when needed.

How is the percentage of completion (POC) calculated?

Percentage of completion (POC) is a commonly used metric to track intermediate progress in a linear job or project. It is calculated by comparing the amount of work completed to the total amount of work to be done to give the project or work a percentage.

For example, if a project has 10 phases and 5 of those phases completed, the percent complete for that project would be calculated by taking the number of phases completed (in this case 5) and dividing it by the total number of phases ( In this case 10) which would give a percentage of 50%.

The percentage of completion (POC) metric can also take into account other factors such as the quality and quantity of work performed to provide a more accurate assessment of progress. Additionally, the POC can also be adjusted to account for any changes in the scope of the project or work by comparing the amount of work that was originally planned to what was completed.

It is important to note that the POC is different from the cost-to-completion metric. The cost to complete requires all the costs incurred in the project as well as the additional costs that would have to be incurred to complete the project.

Below are some tips on percent of completion calculation (POC):

• Periodically evaluate the project to determine the amount of work completed.
• Calculate the amount of work completed versus the amount of work originally scheduled for the project.
• Use quality and/or quantity factors to better capture project progress.
• Remember to consider other factors such as scope changes to accurately gauge progress.

What are the benefits of using Percentage Complete (POC)?

Percentage of completion method (POC) is an accounting technique widely used to recognize revenue earned on long-term contracts, such as construction contracts. It aims to measure the degree of completion of the contract and to match the related revenues, costs and benefits to the corresponding periods.

Here are the benefits of using percent complete (POC):

• Accurate Recognition of Revenues and Expenses – The POC method provides an accurate means of recognizing revenues and related expenses of a long-term contract throughout the project period. This results in the elimination of distortions in the financial statements that could be caused by an all-or-nothing approach to revenue recognition.
• Realistic assessment of financial performance – The POC method also allows companies to accurately track the performance of a contract throughout the term of the contract. This makes it easier to identify and resolve any issues in contract performance that could impede the realization of future benefits.
• Improved cash flow management – Applying the POC method enables companies to better predict their future cash flows and manage their financial resources. The technique also helps businesses make well-informed decisions about their long-term financial resources.
• Reduced contingencies and greater transparency – the POC method significantly reduces the risk of contingencies resulting from long-term contracts. This helps companies address potential liabilities, as well as improve the accuracy of financial statements through greater transparency.

It is important to note, however, that using the POC method is a complex process, requiring specialized software and trained personnel. In addition, it is necessary to accurately assess the cost and expected benefits at each interval of the project to ensure that the method is applied correctly.

What are the disadvantages of using percent complete (POC)?

There are several potential drawbacks to using the percentage of completion (POC) accounting method. While this method is beneficial for companies managing long-term contracts for large-scale projects, the use of POC does not come without some inherent risks.

• One of the risks associated with POC is estimating too optimistically. If a company inaccurately assesses the progress of a project, it could lead to an overstatement of the amount of revenue they can expect to generate from the project. Also, this incorrect valuation may result in the company’s ability not to cover the costs necessary to complete the project.
• Another pitfall with POC is when contract changes are caused by factors beyond the service provider’s control. For example, if a government agency revokes contracts due to unforeseen circumstances, this could result in revenue adjustments that need to be addressed.
• Another difficulty with POC is that companies may be required to make revenue adjustments based on different assumptions that change over time. For example, the accounting assumptions used to assess a project’s % complete may change due to changes in the local economy or government regulations.

It is important that companies using the percentage of completion method (POC) are aware of the associated risks and remain aware of any changes in assumptions that could result in revenue adjustments. Additionally, it is wise to invest in accurate and reliable estimating and project management strategies to minimize the associated risks.

What types of accounting methods are associated with the use of percent complete (POC)?

Percentage of completion (POC) is an accounting method that recognizes revenue generated by long-term projects. It allows you to reserve revenue for a project as the project progresses, instead of waiting for the project to complete. The method is often used in the construction, engineering and software development industries. This involves monitoring the progress of projects over a period of time and recognizing a portion of the revenue earned.

Associated with the POC, there are three main accounting methods: the accrual method, the cost accrual method, and the completed contract method.

• Accumulated accounting – Under this method, revenue from a project is recognized in the accounting period in which the revenue is earned, instead of the period in which the money is received. A revenue recognition principle is used which compares the estimated cost needed to complete the project with the total fees that have been billed or collected over the given interval.
• Cost Accrual Method – This approach to using the POC involves reviewing progress and costs incurred. Progress is analyzed based on incremental amounts and associated costs associated with each part of the project. The total revenue recognized is calculated by subtracting the percentage of non-invited costs from the total amount of contract costs.
• Completed Contract Method – This method involves evaluating the ratio of contract costs that have been incurred to the estimated costs of the entire contract. Revenue is recognized only when the contract is completed. The remaining uninvoiced quantities are then treated as an asset.

When implementing a percentage of completion accounting method, it is important to use fact-based estimates and be sure to update them as needed. Accurately tracking the components of a contract is also essential for success.

What industries typically use percentage of completion (POC)?

Percentage of completion (POC) is an accounting method used to measure the progress of ongoing projects toward completion. This technique is most often found in industries that offer professional services, such as engineering and construction.

In the engineering and construction industries, the POC is an invaluable tool. By measuring the progress of each project, companies can more accurately calculate their profitability for long-term projects. This method is also useful for accurately estimating project completion times and labor costs.

Other industries that use POC include:

• Software development
• Real estate
• Advertising and Marketing
• Consultant

When using POC, it is important to document all elements of each completed project. This will help ensure accurate reporting and budgeting practices. Companies should also consider the impact of change orders, which can significantly affect a project’s progress.

Conclusion:

Using the percentage of completion method (POC) is an effective way to accurately recognize income and expenses in a long-term contract. It provides companies with an accurate way to assess their financial performance, allowing them to manage their resources more efficiently and reduce the risk of contingencies resulting from their long-term projects. However, it is important to note that applying the method correctly requires specialized software and trained personnel.