By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

Accounting for Construction Contracts Under ASPE 3400: A Practical Guide for Ontario Contractors

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

For construction companies operating in Mississauga, the Greater Toronto Area (GTA), and across Ontario, proper accounting for long-term construction contracts is essential for accurate financial reporting, tax compliance, and business decision-making. ASPE 3400 Revenue provides specific guidance on how Canadian contractors should recognize revenue and expenses on construction contracts.

Whether you’re a general contractor, subcontractor, or specialty trade business in Ontario, understanding ASPE 3400 construction accounting can mean the difference between accurate profit reporting and significant financial misstatements that could impact your ability to secure bonding, financing, or future contracts.

This comprehensive guide explains the percentage-of-completion method, the completed contract method, and how to apply ASPE 3400 to your construction business in compliance with Canadian accounting standards.

What is ASPE 3400?

ASPE 3400 Revenue is the accounting standard that governs revenue recognition for private enterprises in Canada, including construction companies. Section 3400 specifically addresses long-term contract accounting and provides two primary methods for recognizing revenue on construction contracts:

Percentage-of-Completion Method (POCM) Recognizes revenue and profit progressively as work is performed
Completed Contract Method (CCM) Defers all revenue and profit recognition until the contract is substantially complete

For most construction companies in Mississauga, Toronto, and throughout the GTA, the percentage-of-completion method is the preferred and most commonly used approach because it provides a more accurate picture of ongoing business performance.

Why Construction Contract Accounting Matters

Construction projects often span multiple accounting periods sometimes extending over several months or even years. Without proper contract accounting:

Financial statements become unreliable Revenue and profit may be significantly misstated
Tax planning becomes impossible You can’t make informed tax decisions without accurate profit recognition
Bonding capacity is jeopardized Surety companies rely on accurate WIP (work-in-progress) reporting
Banking relationships suffer Lenders require properly stated financial position for credit facilities
Business decisions are flawed Management can’t assess project profitability or company performance

For Ontario construction companies, working with a CPA who understands both ASPE 3400 and the construction industry is critical for maintaining financial accuracy and regulatory compliance.

Percentage-of-Completion Method (POCM)

When to Use Percentage-of-Completion

ASPE 3400 requires the percentage-of-completion method when all of the following conditions are met:

The outcome of the construction contract can be reasonably estimated
Revenue and costs can be reliably measured
It is probable that economic benefits will flow to the contractor
The stage of completion can be reasonably measured

For most construction contractors in Mississauga and the GTA working on fixed-price contracts with defined scopes and timelines, these conditions are typically met.

How Percentage-of-Completion Works

Under POCM, revenue is recognized based on the proportion of work completed during each accounting period. The most common method for determining completion percentage is the cost-to-cost method:

Formula:

Percentage Complete = (Costs Incurred to Date  Total Estimated Contract Costs)  100

Example:

Total Contract Value: $1,000,000
Total Estimated Costs: $800,000
Costs Incurred Year 1: $400,000
Percentage Complete: $400,000 $800,000 = 50%
Revenue Recognized Year 1: $1,000,000 50% = $500,000
Gross Profit Year 1: $500,000 – $400,000 = $100,000

Other Methods for Measuring Completion

While the cost-to-cost method is most common, ASPE 3400 also allows:

Units-of-delivery method Based on physical quantities delivered or milestones achieved
Value-added method Based on value of work completed measured by surveys or engineering assessments
Efforts-expended method Based on labor hours or machine hours incurred

The key is consistency once you select a method for measuring completion, you must apply it consistently across similar contracts.

Completed Contract Method (CCM)

When to Use Completed Contract Method

The completed contract method is required when the outcome of a construction contract cannot be reasonably estimated. This typically occurs when:

The project is in very early stages with significant uncertainties
The contractor is working on a cost-plus contract with uncertain scope
There are significant disputes or claims that make final revenue uncertain
The contractor lacks historical data to reliably estimate costs

Under CCM:

No revenue is recognized until the contract is substantially complete
Costs are accumulated in work-in-progress (WIP) inventory
No profit is recognized during construction
All revenue and profit are recognized at completion

While CCM is simpler to apply, it provides poor matching of revenues and expenses and can result in significant profit volatility year-to-year. For most GTA construction companies with established estimating processes, POCM is the superior method.

Key Components of Construction Contract Accounting

1. Contract Revenue

Under ASPE 3400, contract revenue includes:

Initial contract price The original fixed price or estimated revenue under cost-plus contracts
Variations (change orders) Additional work authorized by the customer
Claims Amounts contractor seeks to collect for work not included in contract price
Incentive payments Bonuses for early completion or performance targets

CPA Insight: Change orders should only be included in contract revenue when they are approved in writing and the amount can be reliably measured. In Ontario construction, verbal change orders are risky and should be avoided.

2. Contract Costs

Contract costs include all costs directly attributable to the specific contract:

Direct Costs:

Labor (wages, benefits, payroll taxes)
Materials and supplies
Subcontractor costs
Equipment rental or depreciation allocated to the project
Site supervision
Design and technical assistance specifically for the contract

Indirect Costs (Allocable):

Insurance (general liability, builder’s risk)
Construction overhead
Borrowing costs (if specifically attributable under ASPE 3850)

Excluded Costs:

General administrative expenses
Selling costs (bidding and estimating on unsuccessful bids)
Research and development not related to specific contract
Depreciation of idle equipment

3. Estimated Costs to Complete

The accuracy of percentage-of-completion accounting depends entirely on the reliability of estimated costs to complete. For Mississauga construction companies, this requires:

Detailed project budgets broken down by cost category
Regular budget updates as actual costs are incurred and conditions change
Change order tracking to update total contract value and costs
Subcontractor commitment tracking to ensure all costs are captured
Contingency management for unforeseen conditions

A construction-focused CPA in Ontario can help implement job costing systems that provide real-time visibility into project costs and completion percentages.

Work-in-Progress (WIP) Reporting

Understanding the WIP Schedule

The WIP schedule is the heart of construction accounting under ASPE 3400. It summarizes the status of all contracts in progress and reconciles costs incurred, revenue recognized, and billings to date.

Key WIP Components:

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$headers = $headerRow -split ‘\|’ | Where-Object { # Accounting for Construction Contracts Under ASPE 3400: A Practical Guide for Ontario Contractors

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

What is ASPE 3400?

Percentage-of-Completion Method (POCM) Recognizes revenue and profit progressively as work is performed
Completed Contract Method (CCM) Defers all revenue and profit recognition until the contract is substantially complete

Why Construction Contract Accounting Matters

Construction projects often span multiple accounting periods sometimes extending over several months or even years. Without proper contract accounting:

Financial statements become unreliable Revenue and profit may be significantly misstated
Tax planning becomes impossible You can’t make informed tax decisions without accurate profit recognition
Bonding capacity is jeopardized Surety companies rely on accurate WIP (work-in-progress) reporting
Banking relationships suffer Lenders require properly stated financial position for credit facilities
Business decisions are flawed Management can’t assess project profitability or company performance

For Ontario construction companies, working with a CPA who understands both ASPE 3400 and the construction industry is critical for maintaining financial accuracy and regulatory compliance.

Percentage-of-Completion Method (POCM)

When to Use Percentage-of-Completion

ASPE 3400 requires the percentage-of-completion method when all of the following conditions are met:

The outcome of the construction contract can be reasonably estimated
Revenue and costs can be reliably measured
It is probable that economic benefits will flow to the contractor
The stage of completion can be reasonably measured

For most construction contractors in Mississauga and the GTA working on fixed-price contracts with defined scopes and timelines, these conditions are typically met.

How Percentage-of-Completion Works

Under POCM, revenue is recognized based on the proportion of work completed during each accounting period. The most common method for determining completion percentage is the cost-to-cost method:

Formula:

Percentage Complete = (Costs Incurred to Date  Total Estimated Contract Costs)  100

Example:

Total Contract Value: $1,000,000
Total Estimated Costs: $800,000
Costs Incurred Year 1: $400,000
Percentage Complete: $400,000 $800,000 = 50%
Revenue Recognized Year 1: $1,000,000 50% = $500,000
Gross Profit Year 1: $500,000 – $400,000 = $100,000

Other Methods for Measuring Completion

While the cost-to-cost method is most common, ASPE 3400 also allows:

Units-of-delivery method Based on physical quantities delivered or milestones achieved
Value-added method Based on value of work completed measured by surveys or engineering assessments
Efforts-expended method Based on labor hours or machine hours incurred

The key is consistency once you select a method for measuring completion, you must apply it consistently across similar contracts.

Completed Contract Method (CCM)

When to Use Completed Contract Method

The completed contract method is required when the outcome of a construction contract cannot be reasonably estimated. This typically occurs when:

The project is in very early stages with significant uncertainties
The contractor is working on a cost-plus contract with uncertain scope
There are significant disputes or claims that make final revenue uncertain
The contractor lacks historical data to reliably estimate costs

Under CCM:

No revenue is recognized until the contract is substantially complete
Costs are accumulated in work-in-progress (WIP) inventory
No profit is recognized during construction
All revenue and profit are recognized at completion

Key Components of Construction Contract Accounting

1. Contract Revenue

Under ASPE 3400, contract revenue includes:

Initial contract price The original fixed price or estimated revenue under cost-plus contracts
Variations (change orders) Additional work authorized by the customer
Claims Amounts contractor seeks to collect for work not included in contract price
Incentive payments Bonuses for early completion or performance targets

2. Contract Costs

Contract costs include all costs directly attributable to the specific contract:

Direct Costs:

Labor (wages, benefits, payroll taxes)
Materials and supplies
Subcontractor costs
Equipment rental or depreciation allocated to the project
Site supervision
Design and technical assistance specifically for the contract

Indirect Costs (Allocable):

Insurance (general liability, builder’s risk)
Construction overhead
Borrowing costs (if specifically attributable under ASPE 3850)

Excluded Costs:

General administrative expenses
Selling costs (bidding and estimating on unsuccessful bids)
Research and development not related to specific contract
Depreciation of idle equipment

3. Estimated Costs to Complete

The accuracy of percentage-of-completion accounting depends entirely on the reliability of estimated costs to complete. For Mississauga construction companies, this requires:

Detailed project budgets broken down by cost category
Regular budget updates as actual costs are incurred and conditions change
Change order tracking to update total contract value and costs
Subcontractor commitment tracking to ensure all costs are captured
Contingency management for unforeseen conditions

A construction-focused CPA in Ontario can help implement job costing systems that provide real-time visibility into project costs and completion percentages.

Work-in-Progress (WIP) Reporting

Understanding the WIP Schedule

Key WIP Components:

| Component | Description |

|———–|————-|

| Contract Value | Total estimated revenue including approved change orders |

| Costs Incurred to Date | All direct and allocable indirect costs incurred |

| Estimated Cost to Complete | Remaining costs required to finish the contract |

| Total Estimated Cost | Costs Incurred + Estimated Cost to Complete |

| Estimated Gross Profit | Contract Value – Total Estimated Cost |

| Percentage Complete | Costs Incurred Total Estimated Cost |

| Revenue Earned to Date | Contract Value Percentage Complete |

| Gross Profit Earned | Revenue Earned – Costs Incurred |

| Billings to Date | Amount invoiced to customer |

| Over/Under Billings | Revenue Earned – Billings to Date |

Overbillings vs Underbillings

Underbillings (Contract Asset):

Occur when revenue earned exceeds billings to date
Reported as current asset on balance sheet (“Costs and estimated earnings in excess of billings”)
Represents amount owed to contractor for completed work

Overbillings (Contract Liability):

Occur when billings exceed revenue earned
Reported as current liability on balance sheet (“Billings in excess of costs and estimated earnings”)
Represents deferred revenue or customer advances

For Ontario construction companies seeking bonding or bank financing, properly presented WIP schedules are essential for demonstrating financial health and project management capability.

Handling Contract Losses

Loss Recognition Under ASPE 3400

When a contract is expected to result in a loss (Total Estimated Costs > Contract Value), ASPE 3400 requires immediate recognition of the entire estimated loss, regardless of whether you use POCM or CCM.

Example:

Contract Value: $500,000
Costs Incurred to Date: $300,000
Estimated Cost to Complete: $350,000
Total Estimated Cost: $650,000
Estimated Loss: $150,000

Under ASPE 3400, the full $150,000 loss must be recognized immediately in the current period, even if the contract is only 46% complete ($300,000 $650,000).

Journal Entry:

Dr. Loss on Construction Contract $150,000

Cr. Accrued Loss on Contract $150,000

This conservative approach ensures that financial statements do not overstate contractor profitability and provides early warning signals for project management intervention.

Change Orders and Claims

Accounting for Change Orders

Change orders are common in Ontario construction projects due to unforeseen site conditions, design changes, or owner requests. Under ASPE 3400:

Approved Change Orders:

Increase contract value when approved in writing by the customer
Revenue can be recognized immediately if approval includes price and scope

Unapproved Change Orders:

Cannot be included in contract revenue until approved
Costs incurred should be tracked separately as potential claims
Conservative approach: expense costs as incurred, recognize revenue only upon approval

Accounting for Claims

Claims arise when contractors seek compensation for costs not included in the contract price (delays, differing site conditions, design errors, etc.). Under ASPE 3400, claims should be included in contract revenue only when:

Negotiations have reached an advanced stage
It is probable the claim will be accepted
The amount can be reliably measured

For GTA construction companies, working with both a construction CPA and legal counsel is critical for properly documenting and accounting for claims.

Tax Implications of Construction Accounting

Taxable Income vs ASPE Income

While ASPE 3400 governs financial statement presentation, the Canada Revenue Agency (CRA) has its own rules for tax recognition of construction revenue. Key considerations for Ontario contractors:

Tax Options:

Follow ASPE method Use percentage-of-completion for tax (most common)
Use completed contract Defer revenue for tax even if using POCM for ASPE (limited circumstances)

Tax Planning Opportunities:

Defer revenue recognition by choosing CCM for tax when ASPE allows POCM
Accelerate deductions for materials purchased but not yet installed (subject to CRA rules)
Manage year-end WIP to optimize taxable income across years

A Mississauga CPA with construction tax expertise can help structure your accounting policies to minimize tax while maintaining ASPE compliance.

GST/HST Considerations

Place of Supply Rules

For construction contracts in Ontario, GST/HST (13%) applies based on place of supply rules:

Ontario work 13% HST
Other provinces Provincial rates apply
Exports Generally zero-rated

HST Accounting Methods for Contractors

Regular Method:

Charge HST on progress billings as invoiced
Claim ITCs (input tax credits) on costs as incurred
Most common for contractors over $1.5M annual revenue

Special Quick Method:

Not generally available for construction contractors

Home Construction Rebates:

Special rules apply for new home construction and substantial renovations
Builders must account for deemed self-supply rules
GST/HST new housing rebates must be properly calculated

For Ontario construction companies, HST compliance is complex and errors can result in significant reassessments. Working with a construction-focused CPA in the GTA ensures proper HST treatment of contracts, change orders, and holdbacks.

Common Construction Accounting Mistakes

1. Inaccurate Cost-to-Complete Estimates

Problem: Revenue is overstated because estimated costs to complete are too low.

Solution: Implement monthly project reviews with project managers to update cost forecasts based on actual performance and remaining work.

2. Including Unproven Change Orders in Revenue

Problem: Revenue is recognized for change orders before customer approval.

Solution: Maintain a change order log tracking approval status and only include approved amounts in contract value.

3. Failing to Recognize Losses Immediately

Problem: Continuing to recognize profit on contracts that will ultimately result in losses.

Solution: Monthly WIP reviews with immediate loss accrual when Total Estimated Cost exceeds Contract Value.

4. Incorrect Allocation of Indirect Costs

Problem: General overhead is allocated to contracts, inflating costs incurred and distorting percentage complete.

Solution: Clearly define allocable vs. non-allocable overhead and apply allocation bases consistently.

5. Poor Documentation of Contract Modifications

Problem: Disputes arise over approved scope and pricing of change orders.

Solution: Implement formal change order procedures requiring written customer approval before work proceeds.

Best Practices for Ontario Construction Companies

1. Implement Robust Job Costing Systems

Use construction-specific accounting software (e.g., Sage 300 Construction, Foundation, Viewpoint) that integrates:

Job costing
WIP reporting
Subcontractor management
Change order tracking
Equipment costing

2. Monthly WIP Reviews

Conduct formal monthly WIP meetings with project managers and accounting to:

Update estimated costs to complete for each contract
Review change order status
Identify contracts at risk of loss
Reconcile costs incurred to budget

3. Formal Change Order Process

Implement written procedures requiring:

Written customer approval before work proceeds
Pricing approval before revenue recognition
Change order log tracking approval status
Monthly change order status reports

4. Regular Financial Review with Construction CPA

Meet quarterly with your Mississauga or GTA construction CPA to:

Review WIP schedules for accuracy
Assess impact of contract performance on year-end tax position
Plan for bonding and banking covenant compliance
Identify tax planning opportunities

5. Train Project Managers on Financial Impact

Ensure project managers understand how their estimates and decisions impact:

Company profitability
Bonding capacity
Tax liability
Banking covenants

Many GTA construction companies fail not due to lack of work, but due to poor project-level financial management and inaccurate accounting under ASPE 3400.

Bonding and Banking Implications

Surety Requirements

Bonding companies (sureties) providing bid bonds, performance bonds, and payment bonds for Ontario construction projects require:

Accurate WIP schedules under ASPE 3400
Detailed contract backlogs showing upcoming work
Strong working capital position (current ratio typically >1.3:1)
Positive equity and stable profitability
Experienced management with proven estimating track record

Misstatements in construction accounting can result in loss of bonding capacity, which effectively shuts down contractors from public and institutional work in Ontario.

Bank Financing

Construction lenders in Mississauga and the GTA require:

ASPE-compliant financial statements reviewed or audited by CPA
Detailed WIP schedules showing underbillings and overbillings
Contract backlog schedules demonstrating future revenue
Compliance with debt covenants (leverage ratios, debt service coverage, tangible net worth)

Construction companies with poor accounting practices often face restricted credit access, higher interest rates, or loss of credit facilities entirely.

When to Hire a Construction-Focused CPA

Most general accounting firms lack deep construction industry expertise. Consider hiring a construction-specialized CPA in Mississauga or the GTA if:

You have contracts exceeding $500,000
You need bonding or significant bank financing
You’re transitioning from completed contract to percentage-of-completion method
You’re experiencing project losses or cash flow problems
You’re expanding into new markets or project types
You need to implement or improve job costing systems
You’re facing a CRA audit or GST/HST review

At Insight Accounting CPA, we specialize in construction accounting under ASPE 3400 for contractors throughout Mississauga, Toronto, Brampton, Oakville, and the Greater Toronto Area.

ASPE 3400 vs IFRS 15

Differences for Construction Companies

While most Ontario construction companies use ASPE 3400, larger contractors or those seeking public financing may use IFRS 15 Revenue from Contracts with Customers. Key differences:

| Aspect | ASPE 3400 | IFRS 15 |

|——–|———–|———|

| Contract Combinations | Separate contracts unless closely interrelated | Must assess if multiple contracts should be combined |

| Performance Obligations | Not explicitly addressed | Must identify distinct performance obligations |

| Contract Modifications | Treated as separate contracts or cumulative catch-up | Complex modification guidance |

| Loss Recognition | Full loss recognized immediately | Full loss recognized immediately (similar) |

| Disclosure Requirements | Minimal | Extensive |

For most private construction companies in Ontario, ASPE 3400 is simpler and more appropriate than IFRS 15.

Frequently Asked Questions (FAQs)

1. Can I use cash-basis accounting for my construction business in Ontario?

Answer: Cash-basis accounting is not compliant with ASPE for companies requiring audited or reviewed financial statements, or for companies with contracts spanning multiple years. Most banks and bonding companies require accrual accounting under ASPE 3400. However, very small contractors with same-period contracts may use cash basis for tax purposes (not GAAP financial statements).

2. How do I account for retainage (holdbacks) under ASPE 3400?

Answer: Contract holdbacks (typically 10% in Ontario under the Construction Act) are included in contract revenue when earned under percentage-of-completion, but shown separately as “contracts receivable retainage” on the balance sheet. Holdback does not defer revenue recognition.

3. What percentage complete triggers revenue recognition under ASPE 3400?

Answer: There is no minimum threshold. Revenue is recognized continuously as work is performed under percentage-of-completion method. Even if a contract is only 5% complete, 5% of contract revenue should be recognized (assuming reliable cost estimates).

4. How often should I update my WIP schedule?

Answer: Monthly WIP updates are best practice for Ontario construction companies. At minimum, quarterly updates are required for accurate financial reporting. Year-end WIP must be carefully reviewed before financial statement preparation.

5. Can I switch from completed contract method to percentage-of-completion?

Answer: Yes, but the change is a change in accounting policy under ASPE and requires retrospective application (restatement of prior periods) unless impracticable. Consult with a Mississauga CPA before making this change.

6. Do I need an audit to use ASPE 3400?

Answer: No. ASPE 3400 is an accounting standard, not an assurance standard. However, banks and bonding companies often require audited or reviewed financial statements prepared under ASPE. Compilation-only financial statements (no assurance) can still be prepared under ASPE 3400.

7. How does ASPE 3400 apply to subcontractors vs general contractors?

Answer: The same principles apply to both. Subcontractors use ASPE 3400 for their contracts with general contractors just as general contractors use it for their contracts with owners. The accounting is based on the contractor’s own contracts, regardless of position in the contracting chain.

8. What construction software integrates well with ASPE 3400 accounting?

Answer: Popular construction software for Ontario contractors includes Sage 300 Construction & Real Estate, Viewpoint Vista/Spectrum, Foundation Software, Procore, and QuickBooks Desktop Contractor Edition. Integration with accounting systems is essential for accurate ASPE 3400 compliance.

How Insight Accounting CPA Can Help

At Insight Accounting CPA, we specialize in construction accounting under ASPE 3400 for contractors throughout Mississauga, the GTA, and Ontario. Our construction accounting services include:

Construction Financial Reporting

ASPE 3400-compliant financial statement preparation
WIP schedule development and monthly updates
Review and audit services for bonding and banking
Job costing system implementation and training

Tax Planning for Contractors

Construction-specific tax planning and compliance
GST/HST compliance and audit defense
SR&ED tax credit applications for innovative construction methods
Corporate tax return preparation and CRA audit representation

Bonding and Banking Support

Preparation of bonding applications and financial submissions
Bank financing applications and covenant compliance reporting
Cash flow forecasting and working capital management
Business valuation for succession planning or sale

Construction CFO Services

Fractional CFO support for growing contractors
Project profitability analysis and improvement strategies
Contract review and pricing support
Financial due diligence for acquisitions

Get Expert Construction Accounting Support

Accurate accounting under ASPE 3400 is not optional for Ontario construction companies seeking growth, bonding capacity, and financial stability. Whether you’re a general contractor, subcontractor, or specialty trade business in Mississauga, Toronto, or anywhere in the GTA, working with a construction-focused CPA ensures:

Accurate revenue recognition under percentage-of-completion method

Reliable WIP reporting for bonding and banking

Immediate loss recognition to avoid financial surprises

Tax-efficient construction accounting policies

Improved project profitability through better financial visibility

Contact Insight Accounting CPA today for a complimentary construction accounting review.

(905) 270-1873

info@insightscpa.ca

www.insightscpa.ca

Serving construction contractors throughout Mississauga, Toronto, Brampton, Oakville, Vaughan, and the Greater Toronto Area.

About the Author

Bader A. Chowdry, CPA, CA, LPA is the founder of Insight Accounting CPA Professional Corporation, a Mississauga-based accounting firm specializing in construction industry accounting, tax planning, and fractional CFO services. With extensive experience in ASPE 3400 construction accounting, WIP reporting, and contractor tax compliance, Bader helps construction companies throughout the GTA achieve accurate financial reporting, maintain bonding capacity, and optimize tax efficiency.

Bader is also the creator of the patent-pending AI Governance Framework for accounting and finance, featured in Yahoo Finance and recognized as a thought leader in construction financial management.

For construction accounting expertise you can trust, contact Insight Accounting CPA today.

This guide is for informational purposes only and does not constitute professional accounting or tax advice. Construction companies should consult with a qualified CPA regarding their specific ASPE 3400 compliance, WIP reporting, and tax planning needs.

} | ForEach-Object { # Accounting for Construction Contracts Under ASPE 3400: A Practical Guide for Ontario Contractors

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

What is ASPE 3400?

Percentage-of-Completion Method (POCM) Recognizes revenue and profit progressively as work is performed
Completed Contract Method (CCM) Defers all revenue and profit recognition until the contract is substantially complete

Why Construction Contract Accounting Matters

Construction projects often span multiple accounting periods sometimes extending over several months or even years. Without proper contract accounting:

Financial statements become unreliable Revenue and profit may be significantly misstated
Tax planning becomes impossible You can’t make informed tax decisions without accurate profit recognition
Bonding capacity is jeopardized Surety companies rely on accurate WIP (work-in-progress) reporting
Banking relationships suffer Lenders require properly stated financial position for credit facilities
Business decisions are flawed Management can’t assess project profitability or company performance

For Ontario construction companies, working with a CPA who understands both ASPE 3400 and the construction industry is critical for maintaining financial accuracy and regulatory compliance.

Percentage-of-Completion Method (POCM)

When to Use Percentage-of-Completion

ASPE 3400 requires the percentage-of-completion method when all of the following conditions are met:

The outcome of the construction contract can be reasonably estimated
Revenue and costs can be reliably measured
It is probable that economic benefits will flow to the contractor
The stage of completion can be reasonably measured

For most construction contractors in Mississauga and the GTA working on fixed-price contracts with defined scopes and timelines, these conditions are typically met.

How Percentage-of-Completion Works

Under POCM, revenue is recognized based on the proportion of work completed during each accounting period. The most common method for determining completion percentage is the cost-to-cost method:

Formula:

Percentage Complete = (Costs Incurred to Date  Total Estimated Contract Costs)  100

Example:

Total Contract Value: $1,000,000
Total Estimated Costs: $800,000
Costs Incurred Year 1: $400,000
Percentage Complete: $400,000 $800,000 = 50%
Revenue Recognized Year 1: $1,000,000 50% = $500,000
Gross Profit Year 1: $500,000 – $400,000 = $100,000

Other Methods for Measuring Completion

While the cost-to-cost method is most common, ASPE 3400 also allows:

Units-of-delivery method Based on physical quantities delivered or milestones achieved
Value-added method Based on value of work completed measured by surveys or engineering assessments
Efforts-expended method Based on labor hours or machine hours incurred

The key is consistency once you select a method for measuring completion, you must apply it consistently across similar contracts.

Completed Contract Method (CCM)

When to Use Completed Contract Method

The completed contract method is required when the outcome of a construction contract cannot be reasonably estimated. This typically occurs when:

The project is in very early stages with significant uncertainties
The contractor is working on a cost-plus contract with uncertain scope
There are significant disputes or claims that make final revenue uncertain
The contractor lacks historical data to reliably estimate costs

Under CCM:

No revenue is recognized until the contract is substantially complete
Costs are accumulated in work-in-progress (WIP) inventory
No profit is recognized during construction
All revenue and profit are recognized at completion

Key Components of Construction Contract Accounting

1. Contract Revenue

Under ASPE 3400, contract revenue includes:

Initial contract price The original fixed price or estimated revenue under cost-plus contracts
Variations (change orders) Additional work authorized by the customer
Claims Amounts contractor seeks to collect for work not included in contract price
Incentive payments Bonuses for early completion or performance targets

2. Contract Costs

Contract costs include all costs directly attributable to the specific contract:

Direct Costs:

Labor (wages, benefits, payroll taxes)
Materials and supplies
Subcontractor costs
Equipment rental or depreciation allocated to the project
Site supervision
Design and technical assistance specifically for the contract

Indirect Costs (Allocable):

Insurance (general liability, builder’s risk)
Construction overhead
Borrowing costs (if specifically attributable under ASPE 3850)

Excluded Costs:

General administrative expenses
Selling costs (bidding and estimating on unsuccessful bids)
Research and development not related to specific contract
Depreciation of idle equipment

3. Estimated Costs to Complete

The accuracy of percentage-of-completion accounting depends entirely on the reliability of estimated costs to complete. For Mississauga construction companies, this requires:

Detailed project budgets broken down by cost category
Regular budget updates as actual costs are incurred and conditions change
Change order tracking to update total contract value and costs
Subcontractor commitment tracking to ensure all costs are captured
Contingency management for unforeseen conditions