The Importance of Keeping Good Records for ASC 606 in the Construction Industry

The Importance of Keeping Good Records for ASC 606 in the Construction Industry

August 21, 2025

In the construction industry, maintaining accurate and detailed records is crucial for compliance with ASC 606, Revenue from Contracts with Customers, the revenue recognition standard from US General Accepted Accounting Principles (US GAAP). This standard requires companies to recognize revenue based on the transfer of control of goods or services to customers, which can be particularly complex for long-term construction projects. Good record-keeping ensures that revenue is recognized accurately and consistently, providing a clear picture of a company's financial health and performance.

General Recognition for Contract Assets and Contract Liabilities

Under ASC 606, contract assets and contract liabilities play a significant role in accounting for over or under-billing based on the percentage of completion method (Input Method).

• Contract Assets: These are recognized when a company has performed work but has not yet billed the customer. This situation occurs when the company has recognized revenue based on the percentage of completion but has not yet invoiced the customer for the corresponding amount. For example, if a company has recognized $5 million in revenue but has only billed $4 million, the $1 million difference would be recorded as a contract asset.
• Contract Liabilities: These are recognized when a company has billed the customer in advance of performing the work. This situation occurs when the company has received payment or has the right to receive payment before transferring goods or services to the customer. For example, if a company has billed $6 million but has only recognized $5 million in revenue, the $1 million difference would be recorded as a contract liability.

Properly accounting for contract assets and contract liabilities ensures that the financial statements accurately reflect the company's performance and obligations under the contract.

Key Information Needed for Percentage of Completion Revenue Recognition

To accurately apply the percentage of completion method under ASC 606, construction companies need to track several key pieces of information:

• Project Revenue: The total amount of revenue expected from the contract.
• Project Cost: The total estimated cost to complete the project.
• Cost to Date: The actual costs incurred-to-date on the project.
• Billed to Date: The total amount billed to the client to date.

By keeping detailed records of these elements, companies can ensure that they have all the necessary information to calculate the amount of revenue that should be recognized according to the progress of the project, providing a more accurate reflection of their financial performance.

Handling Contract Modifications and Change Orders

Change orders are a common occurrence in construction projects, and they can significantly impact revenue recognition. When a contract is modified, it's essential to reassess the performance obligations and the transaction price. This may involve updating the project revenue and costs and adjusting the percentage of completion calculation accordingly. Proper documentation and timely updates are critical to ensure that the financial statements remain accurate and compliant with ASC 606.

Common Mistakes to Avoid

The following are some of the most common mistakes that construction companies should avoid:

1. Inconsistent Record-Keeping: Failing to maintain consistent and detailed records can lead to inaccuracies in revenue recognition. Ensure that all project-related information is updated regularly and accurately.
2. Ignoring Change Orders: Not properly accounting for change orders can result in significant discrepancies in revenue recognition. Always update the project revenue and costs when a change order is issued.
3. Overlooking Costs: Failing to track all costs associated with a project can lead to underestimating the total project cost, which affects the percentage of completion calculation. Make sure to include all direct and indirect costs.
4. Delayed Updates: Delaying updates to project records can cause misalignment between the actual progress and the reported progress. Timely updates are essential for accurate revenue recognition.

Examples of the Percentage of Completion Revenue Recognition

Example 1: Commercial Building Construction

Let's consider a construction company that has a contract to build a commercial building for $10 million. The estimated cost to complete the project is $8 million. After the first year, the company has incurred $4 million in costs and has billed the client for $3 million so far. The percentage of completion is calculated as follows:

Percentage of Completion = $4 million/ $8 million

Percentage of Completion = 50%

Based on this calculation, the company would recognize 50% of the total project revenue, or $5 million, as revenue for the first year. Since they only billed $3 million, they will then recognize an additional $2 million of revenue (Credit) and record the offset to a Contract Asset account.

Example 2: Residential Development Project

A construction company is working on a residential development project with a contract value of $15 million. The estimated cost to complete the project is $12 million. By the end of the second year, the company has incurred $9 million in costs and has billed the client $13 million so far. The percentage of completion is calculated as follows:

Percentage of Completion = $9 million/ $12 million

Percentage of Completion = 75%

Based on this calculation, the company would recognize 75% of the total project revenue, or $11.25 million from inception to date of the project. Since they billed $13 million instead, the Company will need to recognize an adjustment to the revenue of $1.75 million (Debit) and record the offset to a Contract Liability account so that the net revenue recognized is $11.25 million ($13 million less $1.75 million)

Invitation for Further Assistance

If you have any questions or need further assistance with ASC 606 compliance, please don't hesitate to contact a Larson accounting expert. Our team is here to help you navigate the complexities of revenue recognition and ensure that your financial reporting is accurate and compliant.  Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.