## Percentage Completion Method (Stage of Completion Method)
### Core Principle
Revenue on construction contracts is recognised each year in proportion to work completed — not at the start or end of the contract.
### Three Methods to Determine Stage of Completion
Method 1: Cost-Based (Most Common in Exams)
```
% Completion = Costs incurred to date
──────────────────────── × 100
Total Estimated Cost
Total Estimated Cost = Costs incurred to date + Future estimated costs
```
Method 2: Surveys of Work Performed
An independent surveyor certifies the % of work completed.
Method 3: Physical Proportion
Based on physical measurement (e.g., 3,000 sq ft tiled out of 10,000 sq ft = 30%).
### Revenue and Profit Recognition – CDR Format
Step 1: Check if loss-making (Total Cost vs Total Revenue).
Step 2: Calculate % completion (cost-based method).
Step 3: Revenue to recognise (till date) = Total Contract Revenue × % completion.
Step 4: Revenue for current year = Revenue till date − Revenue booked in prior years.
Step 5: Cost for current year = Costs actually incurred in current year.
Step 6: Profit/Loss = Revenue (Step 4) − Cost (Step 5).
### Cumulative Application Rule
The % is applied cumulatively each year. Always compute 'till date' figures first, then deduct prior year amounts for the current year P&L.
### Costs Incurred to Date
```
Costs incurred to date = Work Certified + Work Uncertified
```
Work uncertified is adjusted for materials lying unused on-site (exclude unused materials).
### Changes in Estimates
Any revision to total estimated revenue or cost → change in accounting estimate → prospective treatment (no restatement of prior periods). Simply recalculate using revised totals from the current year.
### Example 1
Example 1: Basic Percentage Completion (Ques 4)
Given:
- Total Contract Revenue: ₹85 lakhs
- Costs incurred to date: ₹45 lakhs (Material ₹17L + Labour ₹16L + Specific ₹5L + Sub-contract ₹7L)
- Future estimated cost: ₹35 lakhs
Step 1: Loss check → Total cost = 45 + 35 = ₹80 lakhs < ₹85 lakhs → Not loss-making
Step 2: % Completion = 45 / 80 × 100 = 56.25%
Step 3: Revenue = 85 × 56.25% = ₹47.81 lakhs
P&L for the Year:
| ₹ lakhs |
|---|
| Contract Revenue | 47.81 |
| Contract Cost | 45.00 |
| Profit | 2.81 |
### Example 2
Example 2: Three-Year Contract with Revised Estimates (Illus 10)
Contract: Total Revenue = ₹9,000 (Year 1 estimated total cost ₹8,050; Year 2 revised to ₹8,200)
| Year 1 | Year 2 | Year 3 |
|---|
| Cost incurred (year only) | 2,093 | 3,975 | 2,132 |
| Cost incurred (cumulative till date) | 2,093 | 6,068 | 8,200 |
| Revised total estimated cost | 8,050 | 8,200 | 8,200 |
| % Completion (till date) | 26% | 74% | 100% |
| Revenue recognised (till date) | 2,340 | 6,808 | 9,200 |
| Revenue for year | 2,340 | 4,468 | 2,392 |
| Cost for year | 2,093 | 3,975 | 2,132 |
| Profit for year | 247 | 493 | 260 |
Year 1: % = 2,093/8,050 = 26%; Revenue = 9,000 × 26% = 2,340
Year 2: Cost revised to 8,200; Revenue revised to 9,200; % = 6,068/8,200 = 74%; Revenue till date = 9,200 × 74% = 6,808; Year 2 revenue = 6,808 − 2,340 = 4,468
Year 3: 100% complete; Revenue till date = 9,200; Year 3 revenue = 9,200 − 6,808 = 2,392
### Example 3
Example 3: Fixed Price with Escalation Clause (Ques 9)
Data (₹ in 000s):
- Fixed price: ₹35,000; Escalation clause: 8% → Revised contract price = 35,000 × 1.08 = ₹37,800
- Work certified: ₹17,500; Work not certified: ₹3,815 (includes ₹2,625 material issued, of which ₹1,400 lying unused)
- Actual work uncertified cost = 3,815 − 1,400 = ₹2,675 (unused material excluded)
- Costs incurred to date = 17,500 + 2,675 = ₹21,175 (note: 8% escalation already included)
- Future estimated cost: ₹17,325
- Total cost: 21,175 + 17,325 = ₹38,500
Loss check: Total cost ₹38,500 > Revenue ₹37,800 → Loss-making contract (loss = ₹700)
% Completion = 21,175 / 38,500 × 100 = 55%
Revenue to recognise = 37,800 × 55% = ₹20,790
P&L:
- Contract Revenue: ₹20,790; Contract Expense: ₹21,175; Loss booked: ₹385
- Total loss = ₹700; Additional provision = 700 − 385 = ₹315