The Percentage-of-Completion Method of Accounting for Long-Term Construction Contracts According to ARB No. 45 and SOP 81-1 by William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor
Since I first started in public accounting over thirty years ago, I have witnessed a variety of accounting variations involving the recognition of revenue on long-term construction contracts, even though generally accepted accounting principles is fairly clear and unambiguous regarding its treatment. I suspect that much of the unsystematic treatment in recognizing revenues on contracts may be the result of a devil-may-care attitude on the part of the contractors themselves. Understandably, contractors, perhaps out of necessity, are not what I would describe as “effete” or refined. Many graduated out in the field, in the literal sense of the word, and have often felt a distaste, if not a disdain, for the office side of their business.
Often their “controllers”, or bookkeepers, more likely, were chosen not for their accounting sophistication but for other criteria, such as familiarity with the prevalent software used in the industry, their subservient attitude and their ability to withstand abuse from their contractor superiors, or their willingness to work for very modest wages. It is not surprising, then, that they may lack sufficient sophistication to understand the subtle nuances of GAAP regarding long-term construction contracts.
I have even witnessed certain public accountants lacking sophistication in this specialized area of accounting, even though many of these individuals are certified public accountants. But construction accounting is a specialized industry, rather unique from all other industries, and, consequently, it is not as shocking to me now as it may have been a number of years ago. I was raised in a construction family and directed a construction and development company as well as operated as the controller of several construction firms. Consequently, construction accounting is, so to speak, ”in my blood”.
For those interested, I have written a number of articles on construction accounting. For a general understanding of the accounting of long-term construction contracts, its methodology and its conceptual basis, please see the article, The Percentage-of-Completion Method of Accounting for Long-Term Construction Contracts According to ARB No. 45 and SOP 81-1.
I sinerely hope that you find the article worthy of your time. I welcome your comments. Thank you.