With the new guidelines in ASC 606, firms must recognize revenue in their income statement during the period in which the revenue is earned and not when it is billed. Since professional services firms manage projects that can span across multiple periods, they might not bill until the project is complete. As a result, firms must use a form of percent complete for the project to determine how much revenue to state on their income statement for that period. For example, if during a specific period a firm completes 25% of the project, they must recognize 25% of the revenue that will be earned from the contract for that period.
There are three distinct ways to calculate percent complete:
Using billing percent complete is the most common method. Typically, this is driven by the project manager during the invoicing process. There are two options:
For many firms, this also drives revenue or earnings. Furthermore, it is recommended for people to review the current FASB 606 regulations. This will explain why earning what you invoiced may not be an acceptable solution any longer.
Another common technique is the financial percent complete. The formula for this method is job to date/job to date + estimate to complete. This indicates how much of the total estimate at completion has been spent or burned. When applied to the contract value, we can calculate revenue. Deltek Vision can facilitate this calculation using Resource Planning.
Lastly, physical percent complete can be utilized. This is usually calculated when the user or project manager has entered and can provide the following:
Let’s do some homework. Using a project your firm is executing, calculate/stipulate all three forms of percent complete and compare them. Then write a business case elaborating on the project’s health from these three statistics. You might surprise yourself with the results.