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VideoPercentage of Completion Accounting: Common Risks in Project-Based Businesses
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How Weak PoC Processes Can Affect Financial Reporting, Valuation and Transaction Readiness
For dealmakers evaluating contractors or any project-based business, the percentage of completion (PoC) method of accounting demands scrutiny. Under ASC 606, revenue is recognized over time using an appropriate measure of progress, often the cost-to-cost method, commonly referred to as the PoC method.
As the standard approach for long-term contracts, PoC is both technically complex and highly dependent on operational discipline. When financial processes are weak or inconsistently applied, that complexity introduces meaningful financial and diligence risk.
Poorly executed PoC accounting distorts margins, misstates working capital and introduces timing errors that ripple through EBITDA. As a result, buyers and sellers often struggle to assess true earnings quality and overall financial reliability. Understanding what can go wrong and why it matters is essential for those considering selling, acquiring, financing or investing in businesses with long-term projects.
How Middle-Market Companies Get PoC Wrong
The foundation of PoC is straightforward: Revenue and profit should be recognized proportionally as work is performed, not simply when invoices are issued or cash is collected.
In practice, however, many privately held companies, particularly in the middle market, may lack an accounting background, operational discipline or financial infrastructure to execute this correctly. These gaps often stem from two common approaches to recording financial activity: the modified cash and accrual approaches.
Modified cash and accrual: A fundamental mismatch
The modified cash approach
Some companies use a modified cash approach where costs are recorded when paid and while revenue is recognized when billed. This creates a structural mismatch between revenue and expense, making reported job-level margins unreliable.
In a given period, a company might appear highly profitable simply because it billed aggressively, or alternatively, show declining earnings because it incurred costs ahead of invoicing. Neither outcome reflects economic reality.
This hybrid method is a non-GAAP practice that mixes cash-basis cost recognition with billing-driven revenue.
The modified accrual approach
Also common is a modified accrual approach that applies static profit margins throughout a project’s life, truing up only at completion. While this may create smoother interim reporting, it can mask deteriorating job performance or defer profits to the end of the project.
Estimated project costs that are not periodically updated can result in cost overruns not being reflected in the financials in a timely manner. This often occurs when project managers and finance teams are not aligned on scope changes, cost overruns or budget deviations.
Key takeaway: The downstream consequences are significant. EBITDA is reported in the wrong period, working capital is distorted, and cash flow projections become unreliable. For anyone building a forward-looking model, this creates uncertainty about what the numbers represent. Poor PoC execution can affect valuation, financing discussions and a buyer’s ability to evaluate future performance.
Best Practices: The WIP Schedule as a Financial Control
The work in progress (WIP) schedule serves as the foundation of effective PoC accounting. When prepared consistently, typically monthly, it provides a real-time view of job economics across projects.
At its core, the schedule should capture four key inputs for each active project or contract:
- Total contract value, including any applicable change orders
- Total estimated costs at completion
- Costs incurred to date
- Billings to date
From these inputs, the WIP schedule is used to determine revenue recognized to date, percentage of completion and the over or under-billing position of each project. Approved change orders and revised cost estimates should be reflected promptly to maintain accuracy.
Equally important is the alignment between finance and operations. The most effective WIP processes include regular reviews by both accounting personnel and project managers, covering:
- Cost versus budget performance
- Out-of-scope work eligible for change orders
- Estimates to complete remaining work
In many middle-market companies, this level of coordination is inconsistent and can significantly increase the risk of misstatement. Without alignment between finance and operations, even well-designed processes can produce misleading results.
A WIP schedule is only as reliable as the collaboration behind it.
Why Best Practices Break Down
Understanding why best practices break down highlights not only an accounting risk, but broader organizational challenges that affect financial reliability.
The operations-finance divide
A common issue is the disconnect between the people managing projects and those preparing the financials. Variances may build for months before they are reflected in financial statements. As a result, financials become a lagging, incomplete record of past performance rather than a management tool. This often occurs when operations and accounting teams work in silos and rarely communicate about job status, scope changes or cost trends.
Resource constraints and manual processes
Many middle-market companies operate with lean finance functions where one or two individuals handle all accounting responsibilities. Maintaining a rigorous monthly WIP process, tracking hundreds of cost codes and coordinating with multiple project teams requires time and capability that stretched teams often cannot provide. This can lead to a breakdown in the process, including WIP schedules that are not consistently maintained or updated.
Technology can compound the problem. Industry-specific platforms exist to automate job costing and WIP reporting, but these systems require disciplined data entry and ongoing maintenance. Without adequate staffing, even well-implemented systems can erode the quality of the underlying project data.
In practice, data quality issues can undermine otherwise sound reporting systems.
Cultural and ownership factors
In owner-operated businesses, financial reporting is frequently a lower business priority, and in some cases, not necessary for day-to-day operations.
For example, single-owner pass-through entities or companies without external reporting obligations may operate with a tax-focused mindset. Many owner-operators are more focused on running the business rather than preparing for financing, outside investment or a future transaction. Timely, accurate financial data may only become a priority when one of these events becomes imminent.
This cultural dynamic, where finance is viewed as an administrative function rather than a management tool, should be considered when evaluating the financial reporting reliability of and the readiness for growth, financing or a future sale.
Key takeaway: When an owner treats finance as overhead, buyers should treat the financials as a starting point and not a conclusion.
Business Risks Embedded in Project Portfolios
Long-term contracts introduce a distinct category of operational and financial risks that can affect profitability, cash flow and enterprise value.
Contract leakage and scope management
Scope modifications and cost overruns not identified in a timely manner represent direct margin risk. When changes to project requirements go unrecognized or undocumented, companies miss opportunities to issue change orders and recover costs.
Aged accounts receivable is often an early indicator. Disputes over scope, billing milestones or customer acceptance can stall collections and signal deeper issues.
Indemnification and tail liabilities
Indemnification provisions embedded in contracts represent contingent liabilities that rarely appear in financial statements and are often overlooked. These obligations may require a company to absorb costs related to defects, delays or third-party claims well after a project is complete.
Unless contracts are reviewed directly, these risks remain largely invisible.
Backlog quality and profitability
Backlog is frequently presented as a growth metric, but it typically reflects expected revenue, not cost or margin to generate that revenue.
This matters because the margin assumptions embedded in backlog flow directly into forecasts, valuations and buyer projections. Diligence should test:
- Margin profiles of signed versus unsigned work
- Whether estimates align with historical performance
- Whether current project performance supports backlog assumptions
Without validating these assumptions, companies may overestimate the profitability of future work and make decisions based on unrealistic growth expectations.
Labor, insurance and macro exposures
Long-duration contracts are particularly exposed to cost inflation that cannot be passed through to customers. Tariff or commodity-driven material price increases, labor cost changes and rising insurance costs can erode margins on fixed-price contracts.
Bonding requirements add another layer. The cost of surety bonds or letters of credit can affect liquidity and limit borrowing capacity in ways that are not immediately visible in financial statements.
Reading contracts is not optional. Indemnifications, guarantees and other risks are embedded in contract terms and not cost budgets.
Building More Reliable Financial Reporting with Stronger PoC Practices
The PoC method is only as effective as the processes, controls and communication that support it. Companies that maintain accurate WIP schedules, update estimates regularly and align finance and operations are better positioned to produce reliable financial information, identify risks early and support long-term growth.
As financing, ownership and reporting expectations evolve, strong PoC practices can help businesses improve decision-making and reduce surprises before they become costly problems.
How Weaver Can Help
Project-based businesses face unique accounting and operational challenges that can affect financial reporting, profitability and transaction readiness. Organizations that address PoC risks early are often better positioned to strengthen reporting reliability, improve decision-making and respond confidently to stakeholder scrutiny.
Weaver’s professionals work with management teams to evaluate PoC processes, assess reporting risks, improve financial visibility and identify opportunities to strengthen controls before issues affect growth or deal value. Contact us today.
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