The most common approach is the cost-to-cost method. The formula has two steps. First, divide costs incurred to date by total estimated costs to get your completion percentage. Then multiply that percentage by the total contract price to determine how much revenue you’ve earned.

Here’s a concrete example. You sign a $1,000,000 contract and estimate total costs to complete the project at $500,000. At the end of the month, you’ve spent $200,000 in labor, materials, and subcontractor costs. Your calculation looks like this: $200,000 divided by $500,000 equals 40% complete. Multiply 40% by the $1,000,000 contract price and you get $400,000 in earned revenue. That’s what you recognize on your income statement regardless of how much you’ve actually billed the client.

The gap between earned revenue and billed amounts creates either overbillings or underbillings on your balance sheet. If you’ve billed $450,000 but only earned $400,000, that $50,000 difference is an overbilling, which shows as a liability. If you’ve billed $300,000 but earned $400,000, the $100,000 gap is an underbilling, which shows as an asset. These numbers matter for bonding companies and lenders who review your financial statements.

The accuracy of this entire calculation depends on one thing: how reliable your total estimated cost is. This is where most contractors get into trouble. Over 90% of projects exceed their initial cost estimates due to scope changes, material price fluctuations, weather delays, or subcontractor issues. If your estimate is wrong, your completion percentage is wrong, and your revenue recognition is wrong.

Update your cost estimates monthly. Every month, look at what you’ve spent, what’s committed but not yet billed by subs, and what remains. If your original $500,000 cost estimate now looks like it will come in at $600,000, the math changes significantly. Using the same $200,000 in costs incurred, your completion drops from 40% to 33%. Earned revenue goes from $400,000 to $333,000. That’s a $67,000 swing from a single estimate revision.

Don’t forget committed costs. You may have signed a $75,000 subcontract where only $30,000 has been invoiced so far. The remaining $45,000 is committed and needs to be factored into your cost projections even though it hasn’t hit your books yet. Ignoring commitments makes your cost-to-complete look better than it really is.

Change orders require careful handling. When the project owner approves additional scope, you need to add both the additional contract value and the estimated costs to complete that scope. Unapproved change orders are trickier. Some contractors include the revenue, some don’t. The conservative approach is to include the additional costs in your estimate but not the additional revenue until approval is in hand.

Getting this right requires construction job costing that tracks every dollar by project. If your bookkeeping doesn’t separate costs by job with enough detail to produce a reliable cost-to-complete estimate, the percentage of completion calculation is just guesswork dressed up in a formula.

For Phoenix contractors working long-term projects, this isn’t optional accounting. It’s how your financials reflect reality. If you’re growing and need bonding capacity or bank lines of credit, your surety and lender will expect to see properly calculated overbillings and underbillings. Having professional bookkeeping services that understand construction accounting makes the difference between financial statements that help you and ones that create problems down the road.