The "Percentage of completion"-method forecasted smart

The Percentage of Completion (PoC) is a way of accounting for long-term projects, most commonly in the construction industry. A new solution helps the finance department increase both speed and quality when using PoC in their financial planning process.

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.

There are different ways of recognizing costs and revenue:

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.

There are also different ways of forecasting PoC:

Eventhough there are very different ways of forecasting PoC two major principles have been identified.

Even distribution distributes the sales and/or costs evenly
during the remainder of the projects lifetime.

Milstone-based distribution distributes the sales and/or costs
to set percentages at givven times.

How to solve PoC forecasting in practice? In Effectaplan there is a specific solution to make financial planning for PoC fast and easy. One of Norwegian's largest construction companies is already using it

The PoC solution in Effectplan has several benefits, including:

Giving users system support when forecasting
Percentage of Completion

Improved efficiency and
forecast accuracy

Improved decentralization of
forecasting assignments

Improved consolidation of
forecasted amounts

Improved maintenance and
data integrity