What is a Completed Contract Method?

The completed contract method is an accounting method that involves recording the revenues and expenses from an ongoing project only when it is complete. The most prominent use of this method is for long-term contracts such as those issued by the government. Using the completed contract method affects the time at which tax payments are made.

Most accounting principles require that every expense and revenue is recorded in accounts as and when it is occurred or received. The completed contract method is an exception to this. It's main advantage is that it overcomes the problems of long-term projects giving a misleading impression in accounts. For example, an organization building a football stadium would spend a lot of money up front, but would might not receive payment until it is complete. As the firm knows it will eventually receive the money, and will have planned for this situation, it might be considered unfair if its accounts appeared to show heavy losses during the construction stage.

Even with long-term projects, using the completed contract method is relatively rare. The more common option is known as the percentage-of-completion method. This means that each year's accounts show a proportion of the total income and expenditure that is expected. This is only usually possible for a long-term project with an agreed fee and controlled costs, such as constructing a facility for a client. It works simply enough: if a project is planned to take four years, then at the end of each year, the company will include 25% of the expected expenditure in the costs section of its accounts and 25% of the agreed fee in the revenue section.

Using the completed contract method has implications for tax payments. In one sense, it is a benefit for the company as its profits do not appear until the project is complete, meaning it can delay paying the relevant taxes. In another sense, it can be a drawback as the company is unable to count its expenditure while the project is still underway, meaning it can't use this expenditure to reduce its overall tax liability.

Some countries have tax requirements that affect which method can be used. In the United States, the Tax Reform Act of 1986 and follow-up legislation effectively bars simply using the completed contract method in most cases. A company engaged in a long-term project must either simply use the percentage-of-completion method, or choose to account for 40% of the total value using the percentage-of-completion method and the remaining 60% under its normal accounting method, which can include the completed contract method.