Our estimated construction costs increased sharply. Do we revise prior completion percentages?
Under percentage-of-completion reporting, revised estimated total costs generally affect the current cumulative calculation.
By AE Tax Advisors Team · Updated October 28, 2026
Under percentage-of-completion reporting, revised estimated total costs generally affect the current cumulative calculation. A later estimate does not automatically mean prior returns were erroneous. A genuine estimate revision differs from an error or a change in accounting method, and completed contracts may require a separate look-back review.
A specific business-owner situation
A contractor previously estimated total costs at $800,000. Unexpected site conditions raise the forecast to $1 million. Reusing the old denominator would overstate the current completion percentage.
Illustrative example, not a client result.
What to establish before filing
- Reforecast all remaining work.
- Separate newly learned facts from prior mistakes.
- Reconcile cumulative income less amounts already reported.
Which fact changes the answer?
Information reasonably unavailable when the earlier return was prepared supports an estimate revision. Ignored invoices or an arithmetic mistake require a different correction analysis.
A mistake to avoid
Do not quietly rewrite historical estimates to make the current schedule appear consistent.
Records that support the decision
- Dated estimate versions.
- Site-condition reports.
- Prior-year contract schedules.
The decision to document
Preserve the estimate history and explain the current-year catch-up instead of changing past schedules without a basis.
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Related questions
- We paid to replace a failed subcontractor. How do those costs enter the unfinished contract calculation?
- Our agreement includes land and construction. Does the whole price use the long-term contract method?
Sources and editorial context
- Section 460: long-term contracts
- Treasury regulation 1.460-1: contract classification and completion
- Treasury regulation 1.460-5: contract costs
- Treasury regulation 1.460-4: contract revenue and estimates
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.