Platform
Solutions
Owners
Contractors
Engineering/EPCM
Professional Services
Resources
White Papers
Case Studies
Blog
Videos
Frequently Asked Questions
Company
AboutRead In 8 Minutes
Simplifying Revenue Recognition in Construction
For construction contractors, determining project revenue and what can be billed to the client can be a tricky and time-consuming exercise. Revenue recognition is one of the most critical topics for project-driven organizations to get right. Not least because there are multiple contract models they can face – each with their own methods of recognizing revenue. Accurately recording, recognizing and then billing revenue will all directly impact cashflow, reported profitability, and the confidence of customers and lenders. Yet many organizations struggle with this, because the methods and the data that drive revenue on projects does not live with finance. While finance may be the ones doing the ageing and billing to the client; they aren’t the ones figuring out the construction deliverables, progress or milestones that go into a payment claim to the customer. That comes from the project manager running the project. The project manager in turn gets their input data from the crews in the field.
It’s important to understand a bit about revenue recognition in general, and how it differs based on the project contract model. And additionally, how a project records revenue versus how accounting reports revenue.
Understanding Revenue Recognition Principles
Under IFRS 15 (and ASC 606), revenue is recognized when a company transfers control of goods or services to a customer, in an amount that reflects the consideration it expects to receive. What that means when it comes to project revenue, is that the contractor will bill the client based on the predetermined milestones and payment terms. Along with the required deliverables to meet those milestones.
For contractors, the challenge is determining when obligations are satisfied; and then proving project progress (or completed deliverables) in a traceable and supported way that the customer will approve.
Referring to milestones and progress for revenue, however, usually refers to a lump sum (or fixed price) contract. Other contract types – such as Time & Materials, cost plus, or unit price – will use a more transactional method for accumulating revenue and billing the client.
Learn More About Jobsite Cost Tracking
Revenue Recognition on Different Project Types
The Project Management Institute (PMI) highlights the importance of how you measure progress. Whether through costs, quantities, or milestones, best practice is to ensure alignment between the contract structure and your financial reporting practices. For project management teams, the contract type sets the stage for how revenue should be recognized (and evidenced). Below are a few examples of contract types and their associated revenue recognition methods.
Fixed Price Contracts:
- For Fixed Price (or Lump Sum), revenue is typically recognized using either percentage-of-completion methods (rules of credit, percent budget spent, percent units complete, etc.), or by agreed-upon milestone
- Accuracy depends on timely updates to progress or completed deliverables, along with the ability to evidence substantial completion.
Time & Material Contracts:
- T&M contracts tie revenue directly to actual hours multiplied by resource-specific billing rates. Resources could be labor, equipment, materials, etc.
- T&M contracts rely on complete time & expense capture of labor, equipment, and materials, along with their associated billing rates. Billing rates are typically linked to the discipline, trade or classification of the tracked resource.
Unit Price Contracts:
- With Unit Price, revenue is recognized on quantities installed or completed, multiplied by the agreed-to unit rate of the item completed. This can also be called a “Bill of Quantity (BOQ)”, or “Schedule of Rates” project.
- Unit price requires accurate, frequent quantity reporting from the field; otherwise, contractors under-bill and under-recognize earned revenue.
Cost Plus Contracts:
- Cost Plus is a transactional model that uses a simple cost-plus-markup method for recognizing revenue
- This project type relies on the contractor tracking their costs on labor, equipment, materials, etc., and applying an agreed markup to determine billable revenue
Hybrid Contracts:
- Hybrid refers to a type of contract where more than one of the above contract models are used in the same project. For example, a Fixed Price project could have one or more deliverables that are billed on a T&M model.
Regardless of contract type, timely and accurate updates (anchored in the reality of field progress) are crucial for accurate financials and informed decisions.
Actual Revenue Versus Recognized Revenue
Simply recording revenue on a project doesn’t imply that the revenue can be billed to the client or recognized in the accounting system. From a project perspective, any recorded revenue must go through the required steps before it can be confirmed and ready for billing. These steps can include multiple stages of approval and, in some cases, a proforma invoice to the client before it can be confirmed for billing. Once the revenue has been put onto an invoice and sent to the accounting system for ageing and collections, from the project’s perspective, that revenue is then recognized. The finance team, however, will likely defer recognizing that revenue on their books to a point when they take into account billing cycles, payment terms and actual payment. Revenue recognition from an accounting perspective has more rules around how they can report revenue on their earnings. For the purposes of this article, we’re focusing on project revenue only.
Setting Up The Project For Cost & Revenue
When planning a project, contractors need to plan out where and how they’re going to record revenue on the project versus where and how they record cost. Additionally, if it’s a fixed price or unit price project, how they’re going to record progress or evidence deliverables. This typically means designing the work breakdown structure and cost codes to reflect whether they’re going to recognize cost, revenue or both. For a T&M project, they will also need to determine what billing rates will be used for each billable area of the project.
There’s obviously a bit of thought that needs to go into this, and it really helps to have a system in place to do a lot of that work for you. It helps even further if the system enables you to create standardized project templates so that you don’t have to plan this all out for each new project.
Eliminating Billing Delays
WIP. Unbilled revenue. The last thing any business wants is to have an unnecessary amount of revenue sitting in projects that’s waiting to be billed. The challenge with billing delays is that, in projects, there are numerous steps, people and processes that need to be completed before revenue can be put on an invoice and sent to the client.
Travelling Across Different Hands
Project revenue doesn’t flow in a straight line. It travels across multiple roles:
Every hand-off creates opportunities for delay, error, or misalignment — unless supported by integrated processes and systems.
The Importance of Alignment
When revenue recognition is misaligned, the consequences ripple across the business:
- Field Supervision: Progress in the field may not be reflected in billing or revenue, leading to frustration and disputes.
- Finance: Accountants hold responsibility for accurate financial reporting but lack direct influence over field data, exposing them to audit risk.
- Customers: If invoices don’t match progress, trust erodes, putting relationships, repeat work, and even payment timelines at risk.
- Investors and Lenders: Misstated revenue undermines confidence, potentially affecting credit lines, bonding capacity, and shareholder trust.
Alignment requires process discipline (standard processes, clear contracts, compliance with accounting principals) supported by systems that seamlessly connects field, finance, and other stakeholders.
Setting Your Team Up for Success
Revenue recognition doesn’t have to be a headache. By combining:
- Clear contract frameworks (fixed price, T&M, unit price),
- Disciplined progress tracking and updates, and
- Integrated platforms like 4castplus (unifying field data, project planning, tracking, billing, and finance),
CFOs and Project Managers alike can ensure revenue is recognized accurately, on time, and in compliance. The result: healthier cashflow, reliable profitability reporting, stronger customer trust, and confidence from every stakeholder.
Learn More
Want to see how 4castplus can help your teams work smarter together? From real-time field reporting to integrated cost control and streamlined change management, 4castplus connects every part of your project in one platform. Explore how our solution improves collaboration, boosts profitability, and gives you the visibility to keep projects on track—schedule a demo or learn more today.
