Selecting between input and output methods to measure progress toward completion

The method chosen to measure progress directly drives the timing and amount of revenue recognized over a construction contract's life; picking a method that does not faithfully depict the transfer of control (rather than the one that is easiest to administer) can materially front-load or back-load revenue and distort period-by-period margins on long-duration contracts.

Would a cost-based input method be distorted by uninstalled materials, mobilization costs, or wasted/abnormal costs that do not correspond to progress? Does reliable, independently certified output data (engineer or quantity surveyor milestones, surveys) exist that would better depict progress than a cost ratio? Is the selected method (input or output) applied consistently to similar performance obligations across the portfolio, rather than switched opportunistically? Is the progress estimate reassessed each period as new information emerges, with a documented rationale for the method chosen?

1) Confirm the performance obligation is satisfied over time (control transfers continuously, e.g. the customer controls the asset as it is built or the asset has no alternative use and the entity has an enforceable right to payment for performance to date). 2) For each performance obligation, evaluate the nature of the goods/services being transferred to determine whether an input or output method best depicts that transfer. 3) Test whether a cost-based input method would be distorted by costs that do not correspond to progress, such as uninstalled materials, mobilization, wasted/abnormal costs, or significant subcontractor advance payments; if so, adjust for these or use an output method instead. 4) Where reliable, objective progress data exists (engineer/quantity-surveyor certified milestones, units delivered, surveys of work performed), prefer an output method as it typically depicts transfer of control most directly. 5) Select one method per performance obligation and apply it consistently to similar performance obligations in similar circumstances across the portfolio. 6) Reassess the estimate of progress each reporting period as facts change, and document the rationale for the method chosen.

Under an input method, measure progress as costs incurred to date relative to total expected costs, excluding costs that do not depict progress (wasted materials, abnormal/inefficient costs, and generally uninstalled materials not yet representing work performed unless the entity can demonstrate the materials were procured specifically for and are integral to the project). Under an output method, measure progress directly by reference to units delivered, milestones certified, or surveys of work performed, ensuring the measure is reliably determinable and, ideally, independently verifiable. Reassess and true-up the cumulative revenue recognized each period as the progress estimate is updated (a change in estimate, applied prospectively).

Disclose the method used for each significant class of contract and the reason it faithfully depicts progress, particularly where input and output methods would produce materially different results; disclose significant judgments made in determining the timing of satisfaction of performance obligations and the methods used to measure progress, including any adjustments made to a cost-based input method to exclude non-representative costs.

• Defaulting to a cost-based input method purely because it is administratively simpler, without testing whether it faithfully depicts progress
• failing to adjust the input method for uninstalled materials or inefficient/wasted costs, overstating revenue in early contract periods
• switching between input and output methods across similar contracts without a consistent, documented policy
• treating advance/mobilization payments to subcontractors as if they represent progress on the contractor'
• s own performance obligation
• not revisiting the progress estimate as new information emerges, resulting in stale or unsupported percentage-of-completion figures.