The method
Cost-to-cost is an input method for measuring progress toward satisfying a performance obligation over time, covered in the application guidance of ASC 606-10-55. Progress is the share of total expected cost incurred, and that share of the transaction price is recognized as revenue. The same calculation was the standard percentage-of-completion method for construction contracts before ASC 606.
When to use it
Recompute a contractor's or engineering firm's WIP schedule line by line, test a single contract the client flagged, or check the over or under billing balance that sits on the balance sheet. Do it contract by contract: totals mask a loss contract that a profitable one offsets. Compare the estimated margin with the margin at the prior reporting date and ask what drove any change.
Limits
Cost-to-cost works only if cost reflects the transfer of control. It does not decide whether revenue should be recognized over time in the first place, how to treat change orders or claims, or whether variable consideration is constrained. The loss provision is worked at the contract level; ASC 605-35 also permits an accounting policy election to measure it at the performance obligation level for similar contracts. The prior-period revenue and cost come from the client's schedule. A stale estimate to complete makes every number here wrong.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the cost-to-cost formula?
Percent complete = cost incurred to date ÷ estimated total cost at completion. Revenue to date = contract price × percent complete, and revenue for the period = revenue to date − revenue recognized in prior periods. Gross profit for the period is that revenue less the period’s cost.
What are overbillings and underbillings?
If billings to date exceed revenue to date, the contract is overbilled and the difference is a contract liability (billings in excess of costs and estimated earnings). If revenue exceeds billings, it is underbilled and the difference is a contract asset or, when the right to payment is unconditional, a receivable. Present each contract net.
What if the contract is expected to lose money?
The entire expected loss is recognized as soon as it is known, not spread over the job. The tool shows the loss already in the cost-to-cost result and the remaining provision to record. The loss-provision guidance for construction-type contracts is in ASC 605-35, which stayed in the Codification after ASC 606.
Which costs go in cost incurred?
Costs that depict the transfer of control to the customer. Under ASC 606, an input method such as cost-to-cost needs adjustment when costs are not proportionate to progress: the cost of uninstalled materials that were delivered early, or wasted costs not reflected in the price, are left out of the progress measure.
Why do auditors care about the estimate at completion?
Revenue and margin both swing with the estimated total cost. An optimistic estimate moves revenue into the current period. Auditors test the estimate by comparing prior estimates to actual results, reviewing subsequent costs and change orders, and evaluating management bias as an accounting estimate under AU-C 540.
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