ASC 606 Implementation for Construction Contractors

                                       

By: Erin Silkowski

Partner, Assurance

Key Takeaways

• ASC 606 bases revenue on satisfying performance obligations (transfer of control). Many contractors still use cost-to-cost to measure progress, but must adjust for items like uninstalled materials/inefficiencies.
• Construction commonly meets over-time criteria; and identifying performance obligations can be judgmental (e.g., design vs. build, distinct goods/services). The article’s examples are plausible.
• ASC 606 introduces the contract asset/contract liability framework and related presentation rules; entities present the net contract position for each contract as a contract asset or contract liability, with enhanced disclosure and different terminology than legacy ‘costs/billings in excess’ captions.
• Uninstalled materials: when costs (often major materials) do not depict performance, the cost-to-cost input method may need adjustment. Depending on contract terms and whether control has transferred (including materials delivered to the site), contractors may exclude those costs from the progress calculation for the remaining work and recognize revenue for the material at cost (zero margin) when appropriate.
• Implementation demands updated systems, staff training, and robust documentation to support new judgments and extensive disclosure requirements
• Practical expedients, such as the right-to-invoice method, may simplify revenue recognition for certain contracts but require careful evaluation and disclosure.

For decades, construction contractors relied on the percentage-of-completion method to recognize revenue as projects progressed. The approach aligned well with how contractors manage jobs—tracking costs, monitoring margins, and recognizing revenue as work was performed.

ASC 606 did not eliminate this concept. In fact, most construction contracts continue to qualify for over-time revenue recognition, and many contractors still measure progress using cost-to-cost methods. What ASC 606 did change is the framework used to evaluate contracts and the discipline required around judgments, documentation, and disclosures. Revenue is no longer recognized simply because costs are incurred, but because performance obligations are satisfied and control is transferred to the customer.

For contractors who treat ASC 606 as “business as usual,” the risk isn’t that revenue recognition is entirely wrong—it’s that important nuances may be missed. Areas such as identifying performance obligations, evaluating uninstalled materials, assessing variable consideration, and applying practical expedients can materially affect the timing and presentation of revenue. Understanding where ASC 606 aligns with traditional practices—and where it diverges—is key to maintaining reliable financial reporting and avoiding surprises with lenders and sureties.

Understanding the Five-Step Model

ASC 606 replaces the old percentage-of-completion framework with a five-step model that requires more judgment and documentation than most contractors anticipated.

Step 1: Identify the Contract

This sounds obvious until you consider whether multiple contracts with the same customer should be combined, or whether change orders represent contract modifications or entirely new contracts. The answer affects your entire revenue recognition approach. You need a valid, enforceable contract with commercial substance where payment collection is probable.

Step 2: Identify Performance Obligations

Although construction contracts often list numerous activities—such as design, site work, structural construction, and finishing—this does not automatically mean the contract contains multiple performance obligations. Under ASC 606, many construction arrangements result in a single combined performance obligation because the promised goods and services are highly integrated and together produce one overall asset that the customer has contracted to receive.

A contract contains multiple performance obligations only when promised goods or services are distinct, meaning the customer can benefit from them on their own and they are separately identifiable from other promises in the contract. In practice, this distinction is driven by how the work is executed, not simply how the contract is written. When services significantly modify or depend on one another, or when the contractor provides a significant integration service, the promises are typically combined into a single performance obligation.

Determining whether a contract has one or multiple performance obligations requires judgment and clear documentation. This conclusion directly affects how the transaction price is allocated and how revenue is recognized over the life of the project, making it one of the most important assessments contractors make under ASC 606.

Step 3: Determine the Transaction Price

The total contract value seems straightforward until you factor in variable consideration, such as performance bonuses, liquidated damages for delays, or pending change orders. You need to estimate these amounts and include them in the transaction price only when it’s probable that a significant reversal won’t occur.

Step 4: Allocate the Transaction Price

Once you’ve identified multiple performance obligations, you must allocate the contract price to each based on its standalone selling price. If you don’t sell these services separately, you’ll need to estimate what you would charge. This allocation directly affects the timing of revenue recognition across your project.

Step 5: Recognize Revenue

Revenue is recognized when (or as) you satisfy each performance obligation. For construction, this typically means over time as work progresses. But ASC 606 focuses on when the customer obtains control of the asset, not just when you incur costs.

Right-to-Invoice Practical Expedient

ASC 606 provides a practical expedient that allows contractors to recognize revenue in the amount invoiced when the invoice corresponds directly with the value of performance transferred to the customer to date (often referred to as the “right-to-invoice” method).

This expedient is commonly applied in time-and-materials arrangements or other contracts where billing is based on fixed rates per labor hour or unit of output and those rates reasonably represent the value delivered to the customer.

When the right-to-invoice expedient is used:

• Revenue is recognized equal to the amount billed
• No separate measure of progress is required
• Disclosures must state that the practical expedient has been applied 

Not all construction contracts qualify for this expedient. Contractors must assess whether the billing structure truly reflects the value transferred to the customer, rather than simply being a payment mechanism.

The Critical Shift: Control Over Costs

Traditional percentage-of-completion accounting centered on costs incurred. ASC 606 shifts the focus to when the customer gains control of the asset or service being created. This distinction matters more than you might think.

Under ASC 606, you recognize revenue over time if one of three criteria is met: the customer simultaneously receives and consumes benefits as you perform, the customer controls the asset as it’s created, or you’re creating an asset with no alternative use to you and you have an enforceable right to payment for work completed to date.

Most construction contracts satisfy at least one of these criteria, which is why overtime recognition remains the norm. But the control framework changes how you handle certain situations. Building on customer-owned land? The customer likely controls the asset as it’s created. Fabricating a specialized component in your shop that you’ll install later? That might not transfer control until installation.

Handling the Complications Nobody Mentions

ASC 606 introduces several wrinkles that differ from traditional percentage-of-completion accounting and catch contractors off guard.

Uninstalled Materials present a particular challenge. Under old POC rules, you generally recognized revenue as you purchased materials. ASC 606 requires that materials give rise to revenue recognition only if the customer obtains control. Materials sitting in your warehouse typically don’t transfer control to the customer, even if you’ve purchased them specifically for their project.

Uninstalled Materials and Distinct Costs

ASC 606 requires contractors using a cost-to-cost input method to assess whether certain costs depict performance in satisfying the performance obligation. In some cases, significant material costs—commonly referred to as uninstalled materials—may not represent progress toward completion of the overall obligation.

This evaluation is not based solely on where the materials are located. Materials delivered to a jobsite but not yet installed may still be considered uninstalled materials, depending on whether control has transferred to the customer and whether the costs meaningfully depict performance.

When materials are distinct, do not significantly customize the asset, and represent a significant portion of total contract costs, contractors often:

• Exclude those material costs from the cost-to-cost measure of progress, and
• Recognize revenue equal to the cost of the materials (zero margin) when control transfers, with margin recognized as the remaining work is performed.

Proper identification of uninstalled materials requires judgment and clear documentation, as the treatment can materially affect the timing of revenue and gross margin recognition.

Inefficient Costs 

Inefficient Costs must be excluded from your progress measurement. If you overbuy materials due to poor planning or incur cost overruns from rework, those costs don’t represent progress toward completing the performance obligation. You need systems to identify and exclude these costs from your input measure.

Contract Assets and Contract Liabilities

ASC 606 replaces the legacy construction accounting terminology of “costs and estimated earnings in excess of billings” and “billings in excess of costs and estimated earnings” with contract assets and contract liabilities. A contract asset represents revenue earned through performance but not yet billed, often due to milestone-based or contractual billing terms, while a contract liability represents amounts billed or collected in advance of performance. While the terminology has changed, these balances continue to reflect normal timing differences between work performed and billing.

Under ASC 606, contractors present the net contract position for each contract as either a contract asset or a contract liability, with offsetting limited to amounts related to the same contract and enhanced disclosures explaining the nature of these balances. For lenders and sureties, the underlying economics remain familiar, but contractors should be prepared to clearly explain how these balances relate to project status and billing terms to avoid misinterpretation of routine timing differences as liquidity or collection concerns.

Making Implementation Actually Work

Implementing ASC 606 isn’t a one-time accounting exercise—it requires fundamental changes to how you manage contract information, estimate job costs, and communicate with project teams.

Train Your Team

Project managers, estimators, and accounting staff all play roles in ASC 606 compliance. Project managers need to understand how contract structures affect revenue recognition. Estimators must provide detailed cost breakdowns that support performance obligation allocation. Accounting staff must apply consistent measurement methods and identify exceptions, such as uninstalled materials.

Document Your Judgments

ASC 606 requires significant judgment in assessing performance obligations, estimating the transaction price, and measuring progress. You need contemporaneous documentation supporting these judgments. Your auditors will ask. Your lenders might ask.

Review Contracts Carefully

Standard contract terms you’ve used for years might create revenue recognition issues under ASC 606. Payment terms, milestone structures, and warranty provisions all affect the timing of revenue recognition. Review your standard contracts with accounting implications in mind, and flag unusual contract terms for special analysis.

Getting the Implementation Support You Need

ASC 606 implementation for construction contractors demands expertise in both construction operations and complex accounting standards. At Wiss, we’ve worked with construction companies for decades, helping them navigate accounting changes while maintaining strong relationships with banks, sureties, and other stakeholders.

Our Construction Services Group understands both the technical requirements of ASC 606 and the practical realities of running a construction business. We help contractors assess their current contracts, identify performance obligations, establish appropriate measurement methods, and implement systems that support ongoing compliance.

We work closely with owners and CFOs to strike the right balance between accurate financial reporting and compliance with financial covenants. Because implementing ASC 606 correctly isn’t just about following accounting rules—it’s about presenting your company’s financial performance in a way that supports your business objectives while meeting stakeholder expectations.

Need help navigating ASC 606 implementation? Contact Wiss Construction Services Group to discuss how we can support your revenue recognition compliance and optimization strategy.

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