(Editor’s Note. Though our newsletters focus on contract costing and pricing requirements rather than on financial or tax requirements, we are often asked about financial accounting issues unique to government contractors. Since many of our subscribers are in financial and accounting positions, we thought we would address some of the financial accounting issues government contractors commonly face. In this article we will focus on completed contract and percentage of completion methods while in the next issue we will discuss selected financial and tax issues unique to government contractors. Though much of the discussion in these articles are based on our experience as consultants and former financial and accounting managers, we are particularly indebted to the excellent Mathew Bender text "Accounting for Government Contracts" edited by Lane Anderson.)

Determining when to recognize revenues and costs are key accounting issues all organizations face. Such issues are particularly important to Government contractors because their contracts frequently extend into multiple accounting periods requiring measuring results of long transactions in relatively short accounting periods. Government contracts are particularly difficult since contract performance must be reevaluated and estimates of revenue, cost and contract performance must be relied upon. There are two accounting methods generally used for government contracts - the completed-contract (CC) method and the percentage-of-completion (PC) method.

The principle advantage of the CC method is income is reported on final results rather than periodic estimates while its chief disadvantage is revenue is not reported until the year of completion which distorts income recognition. The advantage of the PC method is that income is recognized as work progresses rather than all at once at contract completion while the disadvantage is the necessity of relying on estimates for recognizing revenue and costs.

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