Percentage of Completion AKA: Progress Invoice
The percentage of completion (AKA: Progress Invoicing) method is an accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period.
Example: 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.
There are many ways to track the percentage of completion in Total Office Manager.
- 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.
- 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.
- 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).
- 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.
- 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 Features to Use
- Always create a “Job”
- Take advantage of the Departmentalisation features
- Create highly detailed estimates
- Create purchase orders, work orders, and pick tickets, from estimates
- Create invoices from estimates (for the total amount, WIP, or progress)
- Use the History form for that Job to view quick facts and detailed information
- Use These Reports (there are others)
- Progress Billing – Estimate vs. Billed
- Job Estimate Vs. Actuals Summary
- Job Estimate Vs. Actuals Detailed
- Estimate Over\Under Details (This is a customizable “Custom Data View”)
- Use the AIA Billing System if required
- Consider using the Inventory Transfer feature
- Use adjusting journal entries (if needed)
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.