I found this also in a Older thread that will help you.
Percentage of completion is really based upon the costs you have incurred to date in relation to your “estimated costs to complete.”
If you take the following fraction:
Total costs incurred to date
____________________________________
Estimated costs to completion
You get your PERCENTAGE of completion.
Multiply this percentage of completion by the gross profit on the contract and you will have your percentage of gross profit to be recognized.
It becomes a little more complicated after the first year. After year one, you need to deduct out previously recognized profit in order to determine what amount of gross profit you should recognize.
Keep in mind also that if there is a cost overrun, you may end up with a loss–construction is one of those narrow profit margin industries that often has this problem.
Also make sure you read the question carefully because they could be asking for COMPLETED CONTRACT method, which is much simpler (obviously).
In any event, if you have a loss you will recognize the entire amount of the loss immediately as is dictated by the rule of conservatism.
I realize my response isn't incredibly detailed, but those are most of the fundamental points behind percentage of completion. I don't think it's an area that you should completely blow off–try to get the calculation down.
I recommend reading the examples in the Becker text and working through them; I found that to be the most effective method for understanding this particular concept.
FAR 05/27/14; 786/110 - Done !
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