Revenue Recognition Methods
What is the percentage of completion (POC) method of revenue recognition?
Recognizes revenue as a project advances, throughout a project lifecycle
What is Sandbagging?
Estimates that are way too low
How is the % of completion calculated?
Total costs incurred to date / Total estimated costs
When should operations talk to finance on job performance?
As soon as estimates change. Monthly meetings with finance, at minimum, strongly encouraged
What is the completed contract method of revenue recognition?
Results in revenue and expenses being recognized once a contract is completed
When should you update your job estimate?
As soon as you know there is a change
What is the most commonly used POC method?
Cost-to-cost
What are the effects of hitting rock on the WIP schedule?
Potential for job fade
What is an example of a type of business that would use POC?
Anyone with projects lasting over 1 year! Asphalt pavers, construction companies, roofers, etc.
What are "Cost & Estimated Earnings in Excess of Billings" or "Underbillings"?
Costs that have not yet been billed that are on the balance sheet as contract assets
Why are estimates SO important?
They determine revenue. Incorrect estimates can result in job fade (BAD)
How does a PMs experience effect a job?
More experienced PMs GENERALLY execute jobs at higher margins and have limited job gain/fade (unless due from extraoridinary circumstances)
Why would you use percentage of completion method?
Help reduce fluctuations in income/more consistent tax due year over year
What are "Billings in Excess of Cost & Estimated Earnings" or "Overbillings"?
Billings are more that the amount of costs that we have recognized and are on the balance sheet as a liability or deferred revenue
What is "job fade"?
When a change in original estimates results in a job having a lower GP%, and therefore less revenues
What is "job gain"?
When a change in original estimates results in a job having a higher GP%, and therefore more revenues
Why would you use Completed Contract Method?
Defer taxes
How often can you change estimates?
ANY TIME
What are the 3 main drivers in calculating POC?
1. Contract price
2. Estimated costs to complete
3. Costs incurred to date
Can you predict estimated profits perfectly?
No