How to Calculate Gross Profit in Percentage of Completion Method
Companies involved in long-term projects might apply the percentage-of-completion method of accounting to ensure that revenues are matched with their associated expenses in the same accounting period. Construction companies typically use this method of measuring gross profit for large contracts that take more than one financial period to complete. Alternative accounting methods, such as the accrual or completed contract methods, may not give a true picture of the company's financial position for tax or management purposes in those circumstances.
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Instructions
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Add up all the actual construction costs to date and divide them by the total estimated costs of the project. Multiply the result by 100 to arrive at the percentage of completion.
For example, a three-year contract has total estimated costs of $75,000, of which $20,000 took place in Year One and $30,000 in Year Two. At the end of Year One, the percentage of completion is $20,000 divided by $75,000 and multiplied by 100, which equals 27 percent. At the end of Year Two, the percentage of completion is $50,000 ($20,000 plus $30,000) divided by $75,000 and multiplied by 100, which equals 67 percent.
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Multiply the total estimated gross profit by the percentage of completion to calculate the gross profit to date. In the example, the estimated gross profit for the whole contract is $25,000. In Year One, multiply $25,000 by 27 percent, which equals $6,750.
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Deduct the gross profit already recorded as earned when calculating the gross profit for later years. In the example, gross profit to date at the end of Year Two is $25,000 multiplied by 67 percent, or $16,750. Deduct $6,750 booked in Year One, to give a gross profit for Year Two of $10,000.
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