The Percentage of Completion Method under ASC?606 in Professional Services,

Part I: Understanding the Percentage of Completion Method in ASC?606 for Professional Services

Revenue is more than a number—it is the story your company tells about performance, delivery, and leadership. In professional services firms operating under long?term, multi?period engagements, aligning that narrative with economic reality requires a deep understanding of the Percentage of Completion (PoC) method under ASC?606. Many CFOs initially view PoC as a technical accounting exercise. But having led finance operations across SaaS, consulting, logistics, and healthcare services, I have learned that PoC can become a competitive advantage, enabling clarity in forecasting, client delivery, and investor confidence.

Alignment starts with recognizing that ASC?606 requires revenue recognition over time whenever one of three conditions is met. Professional services typically satisfy at least the first—customers simultaneously receive and consume benefits as work is performed. From there, determining how to measure progress becomes the core challenge. Misalignment between performance delivery and recognition can distort earnings, hide margin pressures, and mislead stakeholders.

This two?part essay explores:

Why PoC matters in professional services engagements
When to apply ASC?606’s over?time model
Choosing between input and output measures
Common pitfalls and how to avoid them
A real?world example with journal entries

By Part II, you will see not only how to calculate PoC, but how to operationalize it across systems, audits, and executive dashboards.

Why the Percentage of Completion Method Matters

Professional services firms—consulting, systems integration, project?based work—often engage in contracts lasting months or years. Under the older ASC?605, PoC provided a way to recognize revenue as costs were incurred. ASC?606 retains that principle, embedding it in an updated framework.

Enabling accurate PoC recognition avoids large variances upon project completion, supports real?time insights into profitability, and aligns revenue with delivery cadence. More importantly, it gives Boards, investors, and clients greater visibility into project status as an ongoing commitment—not as a sudden event. In competitive markets, that transparency builds trust and accelerates decision?making.

Step 1: Confirm Over?Time Recognition Criteria

Before applying PoC, confirm at least one of ASC?606’s three conditions is met:

Customer benefits as services are delivered
Services create or enhance a customer?controlled asset
Work creates an asset with no alternative use, and there’s a right to payment for performance to date

In most professional services, the first condition holds. Clients consume consulting, integration, training or analytics as they’re provided. Once confirmed, the gateway opens to measuring progress—and PoC becomes the logical path.

Step 2: Choose the Appropriate Progress Measure

ASC?606 allows two categories of measurement:

Input Methods: e.g., cost?to?cost (costs incurred / estimated total cost) or labor hours expended
Output Methods: e.g., milestones achieved, deliverable count, surveys, appraisals, or practical expedient based on billing
- Note: While input methods are reliable, the guidance suggests that output methods can sometimes align more closely with customer experience

Input Methods

Cost?to?cost remains the widely used metric. If $200k costs are incurred on a $400k project, the project is 50% complete—so 50% of the contract value is recognized. This aligns revenue and costs, but assumes cost mirrors progress, which may skew if costs spike before deliverables are realized.

Output Methods

Milestones (e.g., phases, modules) or outputs (units completed) reflect value delivered. For instance, an implementation contract with three phases that have clear deliverables lends itself to output measurement. That method aligns better with customer reception, though it requires rigorous tracking.

Highly customized professional services often favor output methods for clarity, despite operational complexity.

Step 3: Estimate Total Costs and Work

Accurate PoC requires a reliable estimate of total project costs:

Forecast labor, materials, third?party fees
Project direct and indirect costs
Update estimates regularly as scope evolves

In my experience, PoC assumptions degrade when estimates go stale. Quarterly review of total costs is critical to ensuring progress percentages remain valid.

Step 4: Calculate Revenue and Gross Profit Progressively

Once progress percentage is determined, apply it to contract price and total expected gross profit:

Total recognized revenue = Percentage complete × Contract price
Total costs incurred are expensed
Remaining gross profit emerges over term

This allows CFOs to track cumulative revenue and profit—and update forecasts as margin landscape shifts.

Step 5: Maintain Robust Documentation and Controls

Measurement integrity is essential. Key controls include:

Documentation of method choice and rationale
Monthly cost and milestone reports with evidence
Board?approved revenue thresholds
Audit trail of cost estimates and changes

Anticipating auditor questions improves the speed of audits and builds external credibility.

Common Pitfalls and Best Practices

Using cost for input when value is tied to deliverables
- Example: Milestone output may better align with billing and client expectations
Failing to update total cost estimates
- Reassess cost at least quarterly
Mixing input and output for similar obligations
- ASC?606 requires consistency
Ignoring inefficient costs
- Wasted labor or materials should not inflate progress percentage
Forget the disclosure
- Include PoC methods and disclosures in financial statements as required

Strategic Benefits of Proper PoC Application

Forecast Clarity: Predictable revenue and margin patterns
Client Alignment: Financials match what clients experience
Negotiation Leverage: When onboarding is substantiated, upsell credibility increases
Risk Visibility: Cost overruns or project delays surface early

Transitioning PoC Metrics into the CFO Dashboard

A well-designed finance dashboard will include:

Cumulative percent complete
Billings vs. revenue recognized
Cost variance to estimate
Earned gross profit vs. forecast
WIP and deferred revenue metrics

This transparency empowers leadership to act before small variances cascade into large misses.

Part II: Applying the Percentage of Completion Method — Case Study & Walkthrough

In Part I, we explored the framework and judgment behind applying the PoC method under ASC?606. Now, let’s put it into action. This detailed walkthrough illustrates a real-world professional services contract, how PoC applies, sample journal entries, and the CFO’s playbook—complete with dashboard logic and audit preparation.

The Setup: A $1 Million Consulting Engagement

A professional services firm signs a $1?million fixed?price contract to implement and customize a cloud solution over 12 months. The estimated total cost is $800k, with $200k expected profit.

The firm chooses the cost?to?cost input method, updating estimates quarterly. Costs and revenue are tracked monthly. Here is the simplified schedule:

Month	Cost Incurred	Cumulative Cost	% Complete	Revenue Recognized	Gross Profit
1	$60k	$60k	7.5%	$75k	$30k
2	$75k	$135k	16.88%	$168.8k	$67.5k
…	…	…	…	…	…
12	$800k total	$800k	100%	$1M total	$200k

Journal Entry: Month 2 Sample

Costs incurred
Dr?Construction?in?Progress (CIP) $75k
Cr?Accounts Payable $75k

Revenue and gross profit
Dr?CIP $93.8k
Cr?Construction Revenue $168.8k
Dr?CIP (gross profit) $75k

Note: CIP absorbs costs and gross profit until final settlement.

Why CIP Treatment Matters

By capitalizing costs and profitability into CIP, the balance sheet reflects project investment. Upon completion, CIP clears against billings, avoiding balance sheet distortions. This technique enables finance teams to monitor margin at each step, not just at contract end.

Addressing Cost Estimate Revisions

In Month 8, new requirements raise total cost estimates to $900k. This triggers adjustment:

Revised % complete based on cumulative cost ($650k/$900k = 72.2%)
Revenue and profit updated accordingly
Difference recognized immediately (cumulative catch?up)

This ensures PoC reflects current reality and prevents misleading margin assumptions.

Cash vs. Revenue Recognition

In this case, monthly billing is tied to cost milestones. PoC may diverge from cash flow timing, affecting working capital. CFOs must emphasize the difference: recognized revenue ? billed revenue ? cash collected.

The CFO Dashboard

Each month, the CFO reviews:

% complete vs. forecast
Recognition variance due to catch?up or cost adjustment
WIP vs. deferred revenue
Margin trend and delivery pace

This supports decisions on contract pacing, resourcing, and forecasting accuracy.

Audit Considerations and Documentation

Auditors will scrutinize:

Cost estimates and updates
Calculation methodology and consistency
Treatment of inefficiencies or wasted costs
Balances in CIP vs. billings

A completed PoC audit file includes:

Contract file with transaction price and scope
Cost estimate logs per month
Profit and revenue recognition schedules
Board?approved methods
Project milestones and correspondence

When Projects End in Loss

If total cost exceeds transaction price, ASC?606 demands immediate recognition of loss. For example:

Estimated cost rises to $1.05M at Month 10
That would produce a $50k loss
Recognize full projected loss immediately, even before completion

CFOs should track early warning indicators—cost escalation, delivery delays, scope creep—to trigger reserve recognition in advance.

Summary: Turning PoC into Strategic Insight

By applying PoC rigorously:

Professional services firms align their income statements with project reality
Boards receive transparent forecasts tied to delivery
Auditors see traceable cost and revenue linkage
Leadership gains visibility into project health
Clients trust more because billing reflects delivery progress
Financial KPIs reflect strategy—not noise

Conclusion

The Percentage of Completion method under ASC?606 is far more than an accounting mechanism. It is a leadership tool—when professionally applied it aligns recognition with delivery, enhances transparency, strengthens board trust, reinforces audit readiness, and puts revenue on a credible, predictable path.

Part II: Execution, Forecasting, and Real-World Risk Management

In my decades as an operational CFO, particularly with Series A to D firms trying to scale credibility with revenue, few processes have separated disciplined leadership from reactive finance as starkly as the execution of Percentage of Completion (PoC) accounting. The calculation may appear academic, but its real-world impact reaches deeply into cash flow visibility, investor trust, and operational decision-making.

We have already established in Part I that ASC 606 expects over-time revenue recognition where services are continuously delivered, as in most professional services engagements. We also explored how to select the correct measure of progress and how to avoid the most common pitfalls. In this second part, we shift the lens. We ask: How does a company build the muscle to manage PoC effectively at scale?

The answer lies in how finance teams execute estimation discipline, how they manage cross-functional alignment, how dashboards evolve, and how Boards consume and act on PoC-derived insights. This is where finance becomes not just a mirror to the business but a compass.

The Pressure of Rolling Forecasts and PoC

One of the recurring challenges in services-based businesses is that while revenue is recognized over time, the cadence of client activity rarely unfolds in perfect linearity. People get reassigned. Project scopes shift. Change orders emerge. The budgeted hours do not match delivery. In these environments, it is not enough to measure progress once per quarter. Rolling forecast disciplines must take PoC into account monthly, if not more frequently.

That means not just tracking hours or expenses but revisiting estimates to complete. Every month, every engagement should be subjected to a review process that asks the right set of questions:

Are we still on budget?
Have new scope items emerged that were not in the original estimate?
Are we experiencing any inefficiencies or rework that don’t reflect actual value delivered?

In one professional services firm I advised, we created a “burn rate review” cadence. Every Monday morning, delivery leads reported updated hours to complete, and finance refreshed percentage complete accordingly. If new information pushed total costs up, revenue and margins were recalculated immediately. This practice turned hindsight into foresight. Rather than discovering variances during quarterly close, we surfaced them early enough to act.

Elevating Cross-Functional Collaboration

Executing PoC well requires cross-functional buy-in. Delivery, FP&A, operations, and legal must all understand how their behavior affects revenue.

For example, if delivery teams consistently underestimate time to complete, revenue will be overstated early, and profits will compress later. If project managers are not trained in identifying scope changes, new obligations may be delivered without updated contracts—exposing the company to revenue misstatement. If legal does not frame agreements with the appropriate change order language, auditors may challenge revenue recognition.

To address this, one technology consulting company I worked with introduced a mandatory PoC orientation for all project managers and account leads. The finance team created a one-hour primer explaining how project changes affect revenue, margin, and client trust. The result was better forecast inputs and more proactive scoping practices.

You cannot outsource PoC to accountants alone. Everyone involved in client delivery must understand their role in enabling defensible and timely revenue.

Managing Change Orders and Scope Adjustments

One of the most material risks in professional services revenue recognition arises from poorly documented scope changes. Teams often perform work based on client requests without amending contracts. These undocumented changes make it difficult to justify price adjustments, estimate revised costs, or allocate performance obligations correctly.

ASC 606 is explicit that revenue recognition must align with enforceable rights and obligations. This means finance cannot recognize additional revenue from scope changes unless they are formalized.

A sound operational practice is to install a “change order trigger.” This is a policy and system flag requiring any new SOW, email-based scope extension, or timeline shift to route through a formal revenue impact review. Some organizations incorporate these triggers into their project management systems—once a task is created that exceeds the original SOW, the system pauses delivery and routes the request to finance and legal for documentation.

This may feel bureaucratic in fast-moving environments. But I have seen firsthand how undocumented changes snowball into audit issues, restatements, or lost revenue.

Documentation does not slow down execution. It protects it.

Building the Right Dashboards

Many revenue systems capture transactions. Fewer tell the story of trajectory. That’s what the CFO must demand—real-time insight into how PoC revenue affects the business.

The best dashboards are simple and narrative-driven. They focus on directional trends more than point estimates. I recommend a monthly dashboard with the following elements:

Total engagement value vs. recognized to date
Percent complete (based on cost-to-cost or output milestones)
Estimated gross margin trajectory over time
Earned vs. billed revenue (WIP position)
Change orders initiated and their financial impact
Backlog aging and project delivery pace

Visualizing these trends makes it easier for CFOs and boards to see revenue in the context of delivery health, not just accounting milestones. This clarity is especially valuable during fundraising or M&A, when investors scrutinize revenue quality and project realism.

Working Capital Implications

One of the often-misunderstood side effects of PoC accounting is its impact on working capital. Recognizing revenue ahead of billing creates contract assets. Delays in collecting cash create receivables swell. Conversely, recognizing less than billed creates contract liabilities.

This affects DSOs, cash forecasts, and borrowing base calculations. As revenue accelerates under PoC, if billings lag, companies may report higher EBITDA without equivalent cash generation. Boards and VCs must be educated on this distinction.

The solution lies in harmonizing revenue cadence with billing schedules. For high-complexity services, milestone-based billing should align closely with deliverables and estimated costs. Where feasible, progress billing tied to incurred hours helps reduce timing mismatches.

In one Series C firm, we implemented a “billing sensitivity report” showing how PoC revenue diverged from billings by project. This allowed the CFO to explain variances and manage cash proactively with the board.

Revenue and cash are siblings—but not twins. Executives must understand their divergence.

Managing Risk and Recognition in Fixed-Price vs. Time-and-Materials Contracts

Not all professional services contracts are created equal. Fixed-price engagements carry higher risk in PoC because cost overruns affect margin, while revenue remains capped. Time-and-materials (T&M) contracts offer more elasticity but pose fewer recognition challenges.

In fixed-price contracts, finance must closely monitor labor efficiency. Every hour of rework or resource misallocation eats into profit without affecting revenue. This is where aligning resource planning tools with PoC models becomes essential.

In contrast, T&M contracts typically allow revenue recognition as services are rendered and invoiced. However, misclassification can still occur—especially when clients insist on milestone-based payments under a T&M framework. Here again, the clarity of contract terms and consistent documentation determine the strength of revenue recognition.

I advise CFOs to maintain a service matrix: a centralized reference tool outlining how different contract types should be treated under ASC 606, what recognition methods apply, and what triggers require policy escalation.

Communicating PoC Impacts to Investors

Early-stage investors often focus more on bookings and ARR than on GAAP revenue. But as companies mature, PoC-driven revenue timing becomes central to investor communication. Analysts want to know whether growth is being pulled forward or deferred, and whether margins are sustainable.

The CFO must lead this conversation. Quarterly investor updates should explain:

Which projects drove significant revenue recognition
How progress was measured
Whether any cost estimate changes affected margins
What is included in the contract asset or liability balance

These explanations elevate the credibility of reported results and reduce the likelihood of surprises. More importantly, they allow investors to trust not just the income statement, but the operating model behind it.

Transparency is not optional. It is the precondition to valuation.

The Percentage of Completion Method under ASC 606 in Professional Services

Part III: A Full Walkthrough with Calculations and Journal Entries

In Parts I and II, we established the strategic importance of the percentage of completion (PoC) method for professional services organizations, outlined the decision-making framework for applying it under ASC 606, and explored execution, systemization, and leadership. In this third and final installment, we will examine a full example of PoC in action. This includes the revenue calculation mechanics, journal entries, cost updates, margin tracking, and audit implications.

In my 30 years as an operational CFO, I have found that the difference between clean revenue and revenue that invites audit scrutiny often comes down to one thing: operational documentation. The logic must be defensible. The mechanics must be reproducible. And the judgment must be supported by a consistent methodology. This walkthrough gives you the full architecture of how to get there.

Contract Scenario

A professional services firm signs a 10-month, fixed-fee implementation contract for $1.2 million. The project involves software integration, custom configuration, and client onboarding. The firm estimates that total costs will be $900,000, implying a gross profit of $300,000. The firm uses the cost-to-cost method to measure progress, with monthly updates to estimates based on delivery velocity and team burn.

Let us now walk through how revenue is recognized over three stages of the contract: early delivery, midpoint correction, and project completion.

Stage 1: Initial Recognition (Month 3)

At the end of Month 3, cumulative actual costs incurred total $270,000. Original estimated total cost is still valid at $900,000. Therefore:

Percent complete = $270,000 / $900,000 = 30%
Revenue to be recognized = 30% × $1,200,000 = $360,000
Gross profit to date = $360,000 – $270,000 = $90,000

Journal Entries for Month 3

To record incurred project costs
Dr Work-in-Progress (WIP) Asset $270,000
Cr Accounts Payable / Payroll Accruals $270,000
To recognize revenue and move WIP to P&L
Dr Contract Asset (or AR, if billed) $360,000
Cr Revenue (Professional Services) $360,000
Dr Cost of Goods Sold (COGS) $270,000
Cr Work-in-Progress $270,000
To recognize gross profit
This is implicit in the revenue and cost recognition. Net income increases by $90,000.

Stage 2: Estimate Revision and Catch-Up Adjustment (Month 6)

At Month 6, cumulative costs incurred rise to $540,000. However, the team realizes they have underestimated the total effort. Revised total cost is now $1,050,000.

Updated percent complete = $540,000 / $1,050,000 = 51.43%
Cumulative revenue to be recognized = 51.43% × $1,200,000 = $617,160
Revenue already recognized (through Month 3) = $360,000
Catch-up revenue for Months 4-6 = $617,160 – $360,000 = $257,160
Catch-up gross profit = $257,160 – ($540,000 – $270,000) = $87,160

Journal Entries for Month 6

To record additional costs (Months 4–6)
Dr WIP Asset $270,000
Cr Payroll / Vendor Payables $270,000
To recognize catch-up revenue
Dr Contract Asset / AR $257,160
Cr Revenue $257,160
To recognize COGS for Months 4–6
Dr COGS $270,000
Cr WIP Asset $270,000
Impact on financials
Gross profit to date: $617,160 – $540,000 = $77,160
Cumulative net income: $90,000 (first 3 months) + $77,160 = $167,160

Note that although revenue grew, the total margin percentage fell due to increased cost expectations—from 25% originally to 12.9%.

Stage 3: Project Completion (Month 10)

The project is completed in Month 10. Actual total cost ends at $1,080,000, slightly higher than the revised estimate of $1,050,000. Therefore:

Final percent complete = 100%
Total revenue to be recognized = $1,200,000
Revenue already recognized = $617,160
Remaining revenue to be recognized = $582,840
Remaining cost to be recorded = $1,080,000 – $540,000 = $540,000
Final gross profit = $1,200,000 – $1,080,000 = $120,000

Journal Entries for Month 10

To record final costs (Months 7–10)
Dr WIP Asset $540,000
Cr Accounts Payable / Payroll $540,000
To recognize final revenue
Dr Contract Asset / AR $582,840
Cr Revenue $582,840
To recognize COGS
Dr COGS $540,000
Cr WIP Asset $540,000
Close out project file and clear contract asset
Dr AR $1,200,000 (if not already billed)
Cr Contract Asset $1,200,000
Final profit booked
Total cumulative revenue = $1,200,000
Total cost = $1,080,000
Final net income = $120,000

Additional Considerations: Change Orders

Assume in Month 5, the client adds a new feature for an additional $150,000. This is a separate performance obligation and treated as a contract modification.

If the new scope is distinct and priced at SSP, the additional revenue is recognized as a new contract. If it’s not distinct or priced at a discount, revenue may need to be allocated to the combined contract. This change would:

Revise the total contract value to $1,350,000
Increase estimated total costs
Trigger updated percent complete

If the costs are now $1,200,000 and total contract value is $1,350,000, the updated logic flows from that new baseline.

Building the PoC Tracker

For every project, I recommend building a monthly tracker spreadsheet with the following columns:

Contract value
Cumulative cost to date
Total estimated cost (updated monthly)
% complete
Revenue recognized to date
COGS recognized to date
Cumulative margin
Monthly adjustments
Change order flags
Audit notes and reviewer initials

This tracker becomes your audit trail, management dashboard, and strategic health check rolled into one. Keep a PDF copy in your quarter-end audit binder for each project.

Common Triggers for Review

If any of the following occur, you must revisit PoC assumptions:

Scope changes without corresponding pricing updates
Labor overages against plan
Unused budgeted hours (efficiencies)
Material subcontractor changes
Delays in client acceptance or sign-off

Each of these can affect the judgment of cost to complete or whether the project still qualifies for over-time recognition under ASC 606.

Preparing for Audit

Auditors will test not only your math, but your method. They want to know:

Why you selected cost-to-cost over an output method
Whether estimates were reviewed regularly
How scope changes were tracked and reflected
Whether inefficiencies were excluded appropriately
How judgments were documented

A robust PoC file includes:

Original contract and scope
Cost estimate logs (original and revised)
Monthly PoC tracker
Change order approvals
Monthly review signoffs
Communications with delivery team

Anticipate their questions. Document your answers in advance.

Final Thoughts: Accuracy Drives Credibility

This three-part series has unpacked more than just a revenue recognition method. It has illuminated the connection between accounting policy and business maturity. Done right, percentage of completion allows professional services firms to align revenue with effort, smooth earnings, and give all stakeholders confidence in the numbers.

But it is not just about precision. It is about leadership. The CFO must embed this discipline across teams, connect accounting to delivery, and ensure that revenue reflects not only effort—but value.

For firms aiming to scale trust as much as revenue, PoC is not just an accounting choice. It is a strategic posture.

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