To calculate the percentage of work completed in construction, divide progress to date by the total scope of the contract and multiply by 100. “Progress” can be measured three ways: dollars of cost incurred against total estimated cost, physical units installed against total units, or labor hours logged against total estimated hours. The method you pick depends on what actually drives the job, and the denominator you compare against has to reflect every approved change order the moment it’s signed.
The Cost-to-Cost Method
Cost-to-cost is the default for most commercial contractors. Take total costs incurred to date, divide by total estimated costs for the entire project, and multiply by 100. A project with a $1,000,000 budget and $200,000 in expenses is 20 percent complete. That percentage then determines revenue recognition for the period: multiply the percentage by the total contract price.
Material purchases, subcontractor invoices, and equipment costs all feed the numerator. The denominator matters just as much. If unforeseen conditions add $50,000 to the estimated total cost, revise the denominator immediately. Failing to do so inflates the completion percentage and makes the project look further along than it is. Most cost-to-cost errors start here, and experienced project accountants watch the denominator more closely than the numerator.
Uninstalled materials get special treatment under ASC 606, which classifies cost-to-cost as an input method for measuring progress. If a contractor buys $80,000 in custom ductwork that sits on-site but hasn’t been installed, those costs are carved out of both the numerator and the denominator when calculating progress. The contractor recognizes revenue equal to the cost of those stored materials at zero profit margin, then adds that amount to the progress-based revenue figure. Previously, uninstalled materials were excluded from the calculation entirely, so the current rule is more favorable for cash flow.
The Units-of-Delivery Method
Some projects lend themselves to counting physical outputs. Divide units completed by total units in the contract and multiply by 100. A pipeline job calling for 2,000 linear feet is 40 percent done once 800 feet are in the ground, regardless of what the materials cost that month. High-rise construction uses similar logic by counting floors poured or finished.
This works best for repetitive tasks where each unit takes roughly the same effort. Road paving, utility trenching, and modular housing are natural fits. It falls apart when individual units vary wildly, like finishing floors in a renovation where the lobby takes ten times the effort of a storage room.
If scope changes through a formal change order, the denominator adjusts. Adding 500 feet of pipe to the example above bumps total units to 2,500 and drops the current completion rate from 40 percent to 32 percent. The denominator only moves through approved contract modifications, not informal discussions or anticipated extras.
The Labor-Hours Method
For trades where human effort drives the work more than materials, labor hours make a better yardstick. Divide actual hours logged to date by total estimated hours, then multiply by 100. A masonry project budgeted at 1,000 hours with 600 hours logged is 60 percent complete.
The assumption is that hours translate proportionally into finished work. That holds when crews maintain steady productivity, but it breaks down fast when change orders disrupt the sequence. Research from the Construction Industry Institute found that labor efficiency drops to about 70 percent of normal when crews perform work related to changes, largely because changes force tasks out of sequence and create material and information gaps. If a project accumulates enough disruptions, the total estimated hours need revision.
Managers who track labor hours alongside payroll can spot trouble early. If the electrical crew has burned 60 percent of its budgeted hours but only 45 percent of the wiring is in place, productivity is lagging and the estimate needs updating. Catching the gap early enough to adjust the denominator keeps the completion percentage honest.
Keeping the Denominator Honest
Whichever method you use, the percentage is only as good as the total you divide against. Three things have to be current.
Every approved change order adjusts both the total contract value and the estimated cost to complete. Missing a change order in either direction throws off the calculation. Keep a running change order log tied to the specific line items each modification affects.
Revised cost-at-completion estimates matter too, even without a change order. If field conditions push the projected total cost up, the denominator moves up with it. Otherwise your completion percentage keeps drifting higher while the crew burns budget with nothing to show for it.
Documentation is what turns those adjustments into defensible numbers. Cost-to-cost needs supplier invoices, subcontractor payment applications, equipment rental records, and internal labor postings. Labor-hours needs verified timesheets cross-referenced against the original budget. Units-of-delivery needs field measurements documented by the superintendent. When an owner or architect questions a pay application, the contractor who can produce matching records for every dollar or unit claimed resolves the dispute quickly.
Turning the Percentage Into a Pay Application
Before any calculation happens, the contractor and architect agree on how the total contract sum breaks down across individual work items. That breakdown is the schedule of values, and it forms the backbone of every pay application for the life of the project. Each line item, whether site work, structural steel, or finish carpentry, carries a dollar value. The line items sum to the contract price.
The AIA G703 Continuation Sheet is the standard form for presenting this breakdown. It divides the contract sum into portions of the work, tracks the dollar amount completed and materials stored for each line item, and carries forward any retainage withheld.1AIA Contract Documents. Instructions – G703-1992, Continuation Sheet The breakdown can follow trade divisions, subcontractor scopes, or phases of work, but it must stay consistent from the first application through the last.
Front-loading is the biggest risk. A contractor who assigns inflated values to early items, like mobilization or sitework, collects more cash up front than the work justifies. Owners and sureties both watch for this because an overpaid contractor who walks off the job leaves insufficient funds to finish. Many specifications now let the architect reject a schedule of values that appears front-loaded.
Once the percentage is calculated for each line item, the data goes onto an AIA G702 Application and Certificate for Payment, which summarizes the total contract sum, work completed and stored to date, retainage withheld, previous payments, change orders, and the current amount requested.2AIA Contract Documents. Summary – G702-1992, Application and Certificate for Payment The architect or owner’s representative reviews it, typically visiting the site to confirm the reported percentages match what’s built. If the application claims 30 percent on structural steel but only 20 percent is in place, the architect pencils back that line item before certifying payment.
Checking Your Number Against the Bill
The gap between the percentage of work completed and the percentage of the contract billed shows up on a contractor’s work-in-progress report as either overbilling or underbilling. If you’ve billed $300,000 on a $1,000,000 job but cost-to-cost shows only 25 percent completion ($250,000 in earned revenue), you’re overbilled by $50,000. If you’ve billed $200,000 on that same 25-percent-complete job, you’re underbilled by $50,000.
Neither is automatically a problem in isolation. Most projects drift between the two at different points. Patterns matter to lenders and sureties. Chronic overbilling across multiple jobs looks like borrowing from future earnings to fund current operations, which is a red flag for bonding companies. Chronic underbilling suggests the contractor is financing the owner’s project with its own cash. A WIP report tilted heavily in either direction can reduce bonding capacity or trigger deeper audits.
The fix is to keep completion percentages accurate and bill to match. When the numbers diverge, investigate why. Sometimes the cause is a timing issue like materials purchased but not yet installed. Other times it’s a failure to update the estimated cost at completion after a scope change. The WIP report is the single best diagnostic tool a construction accountant has, and it only works when the percentages feeding it are honest.
Where a Wrong Number Costs Real Money
The completion percentage isn’t just a billing figure. The IRS requires most contractors working on long-term contracts to use percentage of completion for tax reporting. Under Section 460 of the Internal Revenue Code, taxable income from a long-term contract must be determined using the percentage of completion method.3Office of the Law Revision Counsel. 26 USC 460 – Special Rules for Long-Term Contracts A long-term contract for this purpose is any contract not completed within the same tax year it begins.
Smaller contractors get an exception. If your average annual gross receipts over the prior three years don’t exceed the Section 448(c) threshold, which is $32,000,000 for 2026, you can use the completed-contract method or another permissible accounting method.3Office of the Law Revision Counsel. 26 USC 460 – Special Rules for Long-Term Contracts Residential construction contracts are also exempt regardless of the contractor’s size. For everyone else, percentage of completion is mandatory. Because estimated total costs inevitably change over a multi-year project, the IRS also requires a retroactive true-up once the contract is finished, calculated on Form 8697.4Internal Revenue Service. Instructions for Form 8697 (Rev. December 2025)
Inflating a completion percentage to pull cash forward is not just an accounting error. On private projects it can lead to breach of contract claims. On federal work the stakes are far higher. The False Claims Act imposes liability on anyone who knowingly submits a false claim for payment to the federal government, including inflated progress reports. The penalty structure includes treble damages, meaning three times the amount the government lost, plus a civil fine of between $14,308 and $28,619 for each individual false claim submitted.5Office of the Law Revision Counsel. 31 USC 3729 – False Claims6Federal Register. Civil Monetary Penalties Inflation Adjustments for 2025 A contractor billing monthly could face dozens of separate per-claim penalties on top of the treble damages.
Even absent fraud, sloppy estimates create problems. Lenders monitoring construction loans compare reported progress against their own inspectors’ observations. A consistent gap can trigger a loan default, freeze future draws, or prompt a third-party audit. The arithmetic of the calculation is simple. Keeping the number honest month after month is where the real work sits.