Revenue Management: #7 Revenue Recognition in Construction & Real Estate Industry
If you are in the construction or real estate business, you are used to long project timelines and progressive invoicing to keep up with your billing. But when does revenue get recognized? Will it happen when the contract gets signed? At different milestones or only at the end of the project? Each phase has its own pace, and the revenue needs to be tracked carefully throughout the end.
How do long-term projects and contract-driven businesses recognize revenue?
Revenue Recognition Scenario in Construction & Real Estate
With long-term projects and multiple deliverables in place, construction and real estate businesses often stretch the process across months or even years. Revenue recognition in these industries is less about timing and more about progress.
Long-Term, Multi-Phase Projects
Construction projects often span many months or years. Recognizing revenue based solely on billing milestones (say 30% upfront, 40% midway, and 30% on completion) doesn't reflect the actual progress or value delivered. Companies must track and report revenue based on performance progress, not payment terms.
Example: $5,00,000 real estate development, $1,00,000 recognized after land acquisition, $2,00,000 during construction in progress and remaining during handover.
Percentage of Completion Method
This industry often uses the percentage of completion method, where revenue is recognized based on the cost incurred or work completed relative to the entire project. Misjudging this percentage can result in misstated finances.
Example: For a $1 million project, if 40% of the work is completed, $4,00,000 is recognized regardless of its payment terms.
Retainage Clauses
In construction, it's common for clients to withhold a portion of the contract until completion. Although the work is completed, the revenue may remain deferred depending on the contract terms.
Example: 10% of the $2,00,000 contract is retained as a deposit. That is, $20,000 will be kept as deferred revenue until completion.
Change Orders and Delayed Delivery
Projects might include design, foundation, electrical, plumbing, and landscaping. Each component might have a separate delivery schedule and must be tracked as a performance obligation. When the scope changes during the progress, companies must reassess the total contract value and the revenue allocation accordingly. On the other hand, if the project execution is postponed, all the revenue earned will remain deferred even if an upfront payment was made.
Example: If a client makes a $5,00,000 upfront payment but the work is delayed, the entire amount will stay in deferred revenue until the obligations are fulfilled.
Proper recognition in this space depends more on accurately tracking project progress and billing terms. It's hard for any business to track all these manually, as any deviation in this might lead to the risk of under- or over-recognition. Sometimes, automated recognition rules may not fit a construction contract, specifically when project timelines are uncertain, milestones don't follow a uniform schedule, or the scope frequently changes.
Businesses may prefer manual revenue recognition to mitigate the risk of miscalculation or inappropriate revenue recognition. This ensures revenue is recorded only when specific deliverables are actually completed.
Scenario:
A construction company signs a $600,000 contract to build a commercial warehouse. The client pays the full payment upfront, but the contract specifies that revenue will only be recognized at key stages of the project completion and not based on the period.
Project stages are defined as:
Site Preparation & Foundation: $100,000
Structural Framework: 30% of contract value
Roofing & Utilities Installations: 40% of the contract value
Interior Finishing & Handover over: Remaining balance
Revenue Recognition with Zoho Billing
Zoho Billing enables businesses like the one above to create flexible revenue recognition rules tied to the project progress and with several deliverables.
Companies rely on manual revenue recognition in most construction projects because project timelines and deliverables are often unpredictable. Manual recognition ensures revenue is recorded only when specific milestones are completed. Automated rules like the percentage of completed or scheduled milestones can still be configured where timelines are more predictable, but manual recognition remains the default approach in this industry. In such cases, rules don't need to be pre-configured; the revenue is recognized manually when the milestone is completed.
Reports in Zoho Billing
At the end of the project, recognition happens only at milestone completions based on the manual entry made by the project management team.
Recognised Revenue Report:
Phases | Completion Date | Recognized Revenue |
Site Preparation & Foundation | 15/Jan/2025 | $100,000 |
Structural Framework | 10/Mar/2025 | $180,000 |
Roofing & Utilities Installation | 25/May/2025 | $240,000 |
Interior Completion & Handover | 30/Jul/2025 | $80,000 |
Total Recognized |
| $600,000 |
Deferred Revenue Report:
Month | Deferred Amount |
Jan 2025 | $500,000 |
Feb 2025 | $500,000 |
Mar 2025 | $320,000 |
Apr 2025 | $320,000 |
May 2025 | $80,000 |
Jun 2025 | $80,000 |
Jul 2025 | $0 |
Revenue Waterfall Report
Billing Date | Total Billed | Jan 2025 | Feb 2025 | Mar 2025 | Apr 2025 | May 2025 | Jun 2025 | Jul 2025 | Recognized Revenue | Deferred Revenue |
Jan 2025 | $600,000 | $100,000 | $0 | $180,000 | $0 | $240,000 | $0 | $80,000 | $600,000 | $0 |
Zoho Billing can efficiently handle change orders, as revenue is recognized manually (Manual Recognition Method). It also allows contract amendments and dynamic revenue reallocation based on project alignment.
Best Practices for Construction & Real Estate Firms' Revenue Recognition
- Break Down Phases as Obligations: Identify architecture and construction as distinct deliverable components.
- Use Percentage of Completion Metrics: Set the base recognition based on cost or time progress, not on the invoicing period.
- Handle Change Orders: Adjust the revenue schedule dynamically when the scope of the project changes.
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