Why home builders SHOULD use percentage of completion instead of cash method.
NOTE: You don't have to use the Percentage of Completion method in CHS. But if you (or your CPA) want to, CHS makes it easy. You’ll save money, reduce errors, and gain far more useful insight into your job performance—every step of the way.
For more about how CHS handles Percentage of Completion for you, watch the accounting video!
The Percentage of Completion (POC) method, recommended by the IRS for long term projects, is an accounting approach that recognizes revenue and profit as a job progresses, based on the percentage of costs incurred compared to the total estimated job cost.
Here's how it works:
If a job is 60% complete (based on incurred costs), then 60% of the contract revenue is recognized—even if the builder hasn’t been paid that full amount yet.
Formula:
% Complete = Incurred Job Costs ÷ Total Estimated Job Costs
Earned Revenue = % Complete × Contract Price
This method gives a much clearer picture of actual progress and profitability throughout the job—not just when payments come in. It’s ideal for long-term projects like custom home building.
Home builders—especially custom home builders working on long-term projects—should use the percentage of completion (POC) method instead of the cash method for several key reasons:
1. Cash method hides job profitability
Under the cash method, revenue is only recorded when payments are received, and expenses are only recorded when they’re paid. That means:
You may show big profits when draws come in, even if work isn’t complete.
Or show a loss if you’ve paid for materials upfront but haven’t billed the client yet.
This makes it nearly impossible to track whether you’re actually on budget—or profitable—on a job at any given time.
2. Percentage of completion aligns revenue with actual progress
POC ties earned revenue directly to how much of the job is complete, based on incurred costs. This means:
Revenue is recognized as work is performed, not just when cash moves.
It gives a clearer picture of how much of the contract price has been earned so far.
3. It supports accurate job cost tracking and forecasting
POC allows builders to compare:
Estimated costs vs. actual costs
Budget progress vs. job progress
Earned revenue vs. billed revenue
This real-time insight is critical for course corrections before problems get out of hand.
4. It prevents misleading financial statements
The cash method can make a company look wildly profitable one month and deeply in the red the next. In contrast, POC:
Smooths out revenue over time
Gives banks, bonding companies, and partners a more accurate view of your true financial health
5. It supports compliance—and is accepted by the IRS
The IRS accepts the percentage of completion method and, in many cases, requires it for long-term contracts. That means you can stay compliant while still managing your business proactively, using earned revenue as your guide instead of waiting on cash flow.
Is it ok with the IRS to switch from cash method to percentage of completion?
What are the steps for doing that?
Yes, it is possible—and often advisable—for home builders to switch from the cash method to the percentage of completion (POC) method, but you must follow IRS procedures to do it properly.
IRS Position
The IRS allows and sometimes requires the use of the percentage of completion method for long-term construction contracts, especially for C corporations or businesses with average annual gross receipts over $27 million (as of tax year 2022, adjusted annually for inflation).
If you're currently using the cash method and want to switch to POC, you’re changing your accounting method for long-term contracts, and that requires IRS approval.
Steps to Switch to Percentage of Completion Method
File IRS Form 3115 (Application for Change in Accounting Method)
You’ll use this form to request a change in method of accounting from cash to POC.
You’ll typically follow the automatic change procedures under Revenue Procedure 2015-13 and 2019-43 (or current versions).
Most construction-related changes fall under the automatic approval list, so you won’t need to wait for explicit IRS consent.
Include a Section 481(a) Adjustment
This adjustment reconciles income and expenses that would have been reported under the new method.
If switching to POC increases taxable income, the extra income is usually spread over 4 years.
Attach to Your Tax Return
You file the completed Form 3115 with your timely filed (including extensions) federal income tax return for the year of the change.
A copy also goes to the IRS’s designated address listed in the instructions.
Maintain Supporting Records
You must maintain adequate records to support the switch and the calculations behind your Section 481(a) adjustment.
Tip
This is a technical tax process, so it’s best to consult with a CPA or construction-savvy tax advisor. But once done, it aligns your tax reporting with how CHS tracks earned income, giving you clearer insight and IRS compliance.
Simple example of a Section 481(a) adjustment a home builder might need when switching from the cash method to the percentage of completion method (POC):
Scenario:
You’re switching from the cash method to percentage of completion accounting on January 1, 2025. One job is mid-construction and active in CHS.
Job Details (as of Dec 31, 2024):
Contract Price: $800,000
Total Job Cost Estimate: $600,000
Actual Incurred Job Costs (entered into payables): $400,000
Customer Draws Received: $500,000
Draws recorded as income under cash method: $500,000
Expenses recorded (based on vendor invoices entered): $400,000
Under cash method:
Income recognized = Draws received = $500,000
Job costs = Incurred = $400,000
Profit = $100,000
Switching to Percentage of Completion (POC) in CHS:
CHS can calculate percent complete automatically using:
% Complete = Incurred Costs / Estimated Job Costs
% Complete = $400,000 / $600,000 = 66.67%
Now calculate earned contract revenue:
Earned Revenue = 66.67% × $800,000 = $533,333
Incurred Costs = still $400,000
POC-based Profit = $133,333
Section 481(a) Adjustment:
You already reported $100,000 profit using the cash method.
Now, under POC, you should have reported $133,333.
So the IRS requires a positive adjustment of $33,333 to reconcile that underreported profit.
You may spread that over 4 years: $8,333/year
Or elect to report it all in 2025
Takeaway:
CHS already has the data you need—job estimate, incurred costs, and contract price—to calculate POC and earned revenue. This makes switching methods not only IRS-compliant, but also more accurate and insightful for your business going forward.
Save on CPA fees by using Percentage Of Completion:
By using the Percentage of Completion method built into CHS, you’ll reduce the year-end scramble. Your CPA won’t have to spend hours reconstructing revenue and job costs—because CHS tracks earned income accurately, all year long.
Using the percentage of completion (POC) method—especially when tracked throughout the year using software like CHS—can significantly reduce the number of hours your CPA has to spend cleaning up your books at year-end. Here's why:
1. Revenue is already aligned with work progress
If you’ve been recording earned revenue monthly using POC:
Your income isn’t artificially inflated or understated.
Your CPA doesn’t need to reconstruct what was actually earned vs. what was just received in cash.
This avoids the time-consuming task of “normalizing” your books at year-end.
2. Costs are tied to the correct job and period
When incurred job costs are posted in real time:
Your CPA doesn’t need to dig through prior months' invoices to match expenses with the correct jobs or billing stages.
They don’t need to adjust timing differences between job cost recognition and actual billing.
3. Eliminates the need for over/under billing workarounds
With POC:
There’s no need to “fix” the WIP schedule or use complicated adjusting entries for unbilled income or over-billed revenue.
That’s a major time saver compared to cash or completed contract methods with back-loaded billing.
4. Easier coordination with tax reporting
If you're using POC internally, your books already align with IRS requirements for long-term contracts—especially if your CPA must file using POC for tax purposes anyway. That eliminates dual tracking or end-of-year conversions.
5. CHS already has the data built in
Because CHS tracks:
Estimated job costs
Incurred job costs
Contract amounts
Change orders
...your CPA can quickly pull earned revenue reports without creating spreadsheets or estimating progress manually.
Bottom line:
POC reduces your CPA’s time because you’re doing the work throughout the year, not saving it all for tax season. And that means fewer billable CPA hours—and more accurate, timely financials for you.