Where the percentage-of-completion adjustment comes from
Cost drives the percentage complete. The percentage complete drives revenue earned. The gap between revenue earned and what you have actually billed is the adjustment — and it lands on the balance sheet as an asset or a liability.
Costs incurred to date
Billings to date
| Percent complete (cost-to-cost) | |
| Revenue earned to date | |
| Less: billings to date | |
| Percentage-of-completion adjustment | |
| Gross profit earned to date | |
| Estimated gross profit at completion |
Debits positive, credits negative.
The estimate on the books has gone stale
Same job, same life-to-date view. The costs and billings are the ones you set above. The only change: the cost to finish has really moved, and the estimate driving your percent complete has not been updated. Percent complete is measured against a denominator that is now wrong, so revenue, gross profit, and your billing position are all wrong with it.
Estimate on the books — the denominator you are using
What the job will really cost — the denominator you should be using
Contract — what you have booked against what you have earned
| On the books | Actual | Variance |
|---|