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Published May 22, 2026 . 10 mins read

What is Revenue Recognition in Construction?

Business

“Billings do not equal revenue in construction accounting.”

That line stops a lot of contractors cold the first time they hear it. But it is one of the most consequential truths in construction finance, and misunderstanding it can make a profitable job look like a disaster, or mask a real problem until it’s too late.

Revenue recognition in construction is the process of determining when and how much revenue to record on a project, based on actual work completed rather than what has been billed. Under ASC 606, the accounting standard that governs long-term contracts, most contractors are required to recognize revenue using the percentage of completion method, matching revenue to costs as work progresses, not when invoices go out.

This post walks through how that works, why it matters, and what contractors get wrong.

Chris Mast, CPA, CCIFP
Director of Construction Industry Services at GBQ

GBQ Partners LLC

Why Billings Don’t Equal Revenue

Construction projects rarely follow a clean, transaction-style exchange. Unlike buying a product, where the seller recognizes revenue the moment the sale closes, construction contracts stretch across months or years. Work happens in phases. Billing schedules are negotiated upfront and often don’t track with actual progress.

“In construction, a lot of times we’re working with contracts that last months if not over a year,” explains Chris Mast, Director of Construction Industry Services at GBQ Partners, a Top 100 accounting and consulting firm. “The big confusion is that people still think you’re going to recognize revenue based on what you’ve billed.”

That confusion has real consequences. A contractor who has done substantial work but has not sent an invoice yet will look unprofitable on paper. One who front-loads billing on a project that has barely started will look far more profitable than they actually are. Neither picture is accurate, and both can create problems with banks, bonding companies, and ownership.

“

I’m very excited about ProNovos because I believe it’s going to save our clients a lot of time and money both in the field and in the accounting office. GBQ and I have been so involved with ProNovos because we really believe it can make a big difference.

Chris Mast, CPA, CCIFP
Director of Construction Industry Services at GBQ

How Percentage of Completion Accounting Works

Under the percentage of completion method, revenue is earned in proportion to how much of the project is actually complete. The calculation uses three inputs:

1

Determine Percent Complete

Cost to date ÷ Estimated total project cost

2

Calculate Revenue Earned to Date

Percent complete × Total contract amount

3

Identify Over- or Underbillings

Revenue earned to date – Amount billed to date

The result of Step 3 is what drives the WIP schedule adjustment on your financial statements, pulling your income statement back to reflect what you have actually earned, not what you have invoiced.

Example 1: The Underbilled Project

Consider a $1 million contract with $930,000 in estimated costs. Costs to date are $465,000, but no invoice has gone out yet.

Without a percentage of completion adjustment, the income statement shows zero revenue. “If you sent this to the bank or your owner, it would look like you were about to go bankrupt,” Mast notes.

Run the numbers:

$465,000 cost to date ÷ $930,000 estimated cost = 50% complete

50% × $1,000,000 contract = $500,000 revenue earned to date

$500,000 earned – $0 billed = $500,000 underbilled

That $500,000 underbilling gets added back to the financial statement as an asset, restoring an accurate picture. Revenue and costs now hit the income statement together, the way they should.

“The whole idea is we’re matching our expenses with our revenues so they’re hitting at the same time,” Mast explains.

Example 2: The Overbilled Project

Now flip it. Same contract. No costs have been incurred yet, but the contractor has billed $500,000 upfront.

$0 cost to date ÷ $930,000 estimated cost = 0% complete

0% × $1,000,000 = $0 revenue earned to date

$0 earned – $500,000 billed = $500,000 overbilled

“You send that to your owner and they think they can go out and buy a boat. You need to be really careful when you’re recognizing revenue and presenting financial statements in construction.”

Chris Mast, CPA, CCIFP — Director of Construction Industry Services, GBQ Partners

The percentage of completion adjustment wipes out that phantom profit, leaving the accurate picture: -$25,000 in SG&A with no earned revenue to offset it yet.

Over/Underbilling Calculator

Enter your project figures below. All dollar amounts should reflect the current state of a single active project.

$
Total value of the signed contract
$
Your current cost-to-complete estimate
$
Actual costs incurred so far
$
Total invoiced to the owner so far

Results are for illustrative purposes only and do not constitute accounting, legal, or financial advice. Consult a qualified CPA for GAAP-compliant revenue recognition guidance.

Why Estimated Costs Matter More Than Most Contractors Realize

The denominator in your percent complete calculation is the estimated total project cost, and changing it moves everything.

In the example above, if the project manager updates her estimate from $930,000 down to $800,000 (because she found a more efficient approach), the calculation shifts substantially:

$465,000 ÷ $800,000 = 58.125% complete (up from 50%)

58.125% × $1,000,000 = $581,250 revenue earned

$581,250 – $500,000 billed = $81,250 underbilled

Old Estimate ($930k)

$10,000

Net income

Updated Estimate ($800k)

$91,000

Net income

“All because I changed the estimated cost to complete.”

Chris Mast, CPA, CCIFP — Director of Construction Industry Services, GBQ Partners

This is why accurate, current cost-to-complete estimates are not just a project management concern. They directly shape what your financial statements say about your profitability.

How Often Should Contractors Run These Calculations?

At a minimum, monthly. Contractors who wait until year-end to run percentage of completion adjustments will have monthly financials that “look like a roller coaster,” Mast warns — swinging wildly as the annual adjustment lands all at once.

Monthly WIP reconciliation keeps financial statements stable, lender-ready, and useful for internal decision-making. It also reduces the risk of surprises at year-end, when auditors and bonding agents are reviewing your books.

The Problem with Excel-Based WIP Schedules

Most contractors still manage their WIP schedule in Excel. “At least ninety percent of the time, it’s completed in Excel, which is prone to formula errors,” Mast says. Tying that manually calculated schedule back to an ERP system and then to financial statements — in a way that holds up to audit — is time-consuming and error-prone for both the contractor and their CPA.

The work is substantial: breaking out current-year performance from prior-year carryover on jobs that span multiple periods, reconciling to the income statement, and ensuring the supporting data is traceable. “It can be a very tedious process, not just for the client, but also when I come in,” Mast explains.

Excel-Based WIP

✕

Prone to formula errors

✕

Manual reconciliation to ERP

✕

Difficult to audit and trace

✕

Time-consuming for CPAs

Automated WIP Platform

✓

Connected directly to ERP data

✓

Eliminates manual reconciliation

✓

Clean, auditable financial picture

✓

Faster, lender-ready reporting

Contractors who automate this process using financial analytics platforms connected directly to their ERP data eliminate the manual reconciliation step — and give their accounting team, lenders, and bonding companies a cleaner, faster, more auditable picture.

Frequently Asked Questions

What is revenue recognition in construction?

Revenue recognition in construction is the accounting process of recording revenue as it is earned based on project completion, not when it is billed. Most contractors use the percentage of completion method, which ties revenue to the proportion of costs incurred relative to total estimated project costs.

What does ASC 606 require for construction contractors?

ASC 606 is the GAAP standard governing revenue from contracts with customers. For construction, it generally requires recognizing revenue over time using a measure of progress — most commonly the cost-to-cost method, which is the foundation of percentage of completion accounting.

What is the difference between overbilling and underbilling?

Overbilling occurs when a contractor has invoiced more than the revenue they have earned based on percent complete. Underbilling is the reverse — work has been performed but not yet billed. Both are captured on the WIP schedule and adjusted on the financial statements to reflect actual earned revenue.

How often should contractors update their WIP schedule?

Monthly, at minimum. Waiting until year-end creates volatile monthly financials and makes it harder to catch job cost problems early. Monthly WIP reconciliation also keeps financial statements lender-ready and audit-ready throughout the year.

Why do estimated costs affect revenue recognition?

Estimated total project cost is the denominator in the percent complete calculation. When estimates change — because of scope shifts, efficiency gains, or cost overruns — the percent complete changes, which directly changes how much revenue is recognized. Inaccurate estimates can materially misstate both revenue and profitability.

What is a WIP schedule in construction?

A WIP (work in process) schedule is a financial report that tracks the status of all active projects, showing contract amounts, costs to date, estimated costs, billings, and the resulting over- or underbillings. It is the primary tool for applying percentage of completion accounting and is reviewed by lenders and bonding companies as part of financial due diligence.

Additional Resources

Revenue recognition in construction is not a year-end exercise, it is an ongoing discipline that shapes how your company looks to banks, bonding agents, and ownership every single month.

If you want to go deeper, these resources are a good next step:

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