The cost-to-cost method of measuring progress

The cost-to-cost method looks mechanical: costs to date over total costs. But the answer is only right if every cost in it reflects work actually transferred to the client. This guide works through a building contract with lifts delivered but not installed and a costly mistake on site, and explains which costs to exclude, how to estimate costs to complete, and when another method fits better.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

The cost-to-cost method measures progress on a contract as costs incurred to date divided by total expected costs, and recognises that share of the contract price as revenue. It is the most common input method in construction. IFRS 15 requires costs that do not reflect the transfer of control to be adjusted: wasted materials and inefficiencies are excluded, and significant materials delivered but not yet installed are recognised at cost with no margin. In this guide's example, these adjustments reduce year-end revenue from 5.25 million to 4.75 million.

At a glance

Formula
Costs to date / total expected costs
Type
Input method
Exclude
Waste and inefficiencies
Uninstalled materials
Revenue at cost, no margin
Key estimate
Costs to complete
Alternative
Output methods, such as surveys
The cost-to-cost method of measuring progressFormula: Costs to date / total expected costs; Type: Input method; Exclude: Waste and inefficiencies; Uninstalled materials: Revenue at cost, no margin; Key estimate: Costs to complete; Alternative: Output methods, such as surveys.KEY FACTS AT A GLANCEThe cost-to-cost method of measuring progressFormulaCosts to date / totalexpected costsTypeInput methodExcludeWaste and inefficienciesUninstalled materialsRevenue at cost, nomarginKey estimateCosts to completeAlternativeOutput methods, such assurveysTax BakersThe cost-to-cost method of measuring progressFormula: Costs to date / total expected costs; Type: Input method; Exclude: Waste and inefficiencies; Uninstalled materials: Revenue at cost, no margin; Key estimate: Costs to complete; Alternative: Output methods, such as surveys.KEY FACTS AT A GLANCEThe cost-to-cost method ofmeasuring progressFormulaCosts to date / total expected costsTypeInput methodExcludeWaste and inefficienciesUninstalled materialsRevenue at cost, no marginKey estimateCosts to completeAlternativeOutput methods, such as surveysTax Bakers
Key facts at a glance, as set out in this guide.

The cost-to-cost method on construction contracts: an example

A contractor builds an office block for CU 10 million, with total expected costs of 8 million, including lifts costing 1.6 million bought from a specialist supplier. At the year end, costs incurred are 4.2 million. They include the lifts, delivered to site and controlled by the client but not yet installed, and 0.2 million of rework after the contractor poured a floor slab incorrectly.

Progress with and without IFRS 15 adjustmentsProgress with and without IFRS 15 adjustmentsTOPICUnadjustedAdjustedCosts counted4.22.4Total costs used8.06.4Progress52.5%37.5%Revenue5.254.75Profit1.050.55
Uninstalled lifts and rework would overstate progress.
CU millionUnadjustedAdjusted under IFRS 15
Costs counted towards progress4.24.2 - 1.6 lifts - 0.2 rework = 2.4
Total expected costs used8.08.0 - 1.6 lifts = 6.4
Progress52.5%37.5%
Revenue5.250.375 x 8.4 + 1.6 lifts at cost = 4.75
Costs expensed4.24.2
Profit1.050.55

Counting the lifts' cost as progress would treat the contractor as half finished when it has done well under half the building work, and the rework would make a mistake look like progress. The adjusted figure recognises the lifts at cost, with their margin earned when they are installed, and expenses the rework without counting it.

When are uninstalled materials recognised at cost?

IFRS 15 sets the conditions: the item is not distinct, the client obtains control of it before it is installed, its cost is significant relative to the total expected costs, and the contractor obtains it from a supplier without being significantly involved in designing or making it. Revenue equal to its cost is then recognised when control passes. Materials still in the contractor's stores are inventory and not counted at all.

Which other costs are excluded?

  • Wasted materials, labour or other resources from inefficiencies that were not reflected in the contract price, such as rework of defective work.
  • Costs that do not relate to the contract, such as general overheads not directly attributable to it.
  • Pre-contract and mobilisation costs that do not transfer anything to the client; see mobilisation and tender costs.

How do subcontractor costs fit in?

Subcontract costs count when the subcontractor's work is done, usually as it is certified, not when the subcontract is signed or an advance is paid. An advance paid to a subcontractor is a prepayment until the related work is performed, so it does not count towards progress until the subcontractor actually does the work.

How are costs to complete estimated?

From a bottom-up forecast of remaining work: subcontracts let and to be let, materials, labour, plant, site overheads, risks and contingencies, updated every period by the project team and reviewed by finance. A rise in costs to complete lowers progress to date as well as the expected margin, and both effects are caught up in the current period. Optimistic cost-to-complete estimates are one of the most common sources of contractor losses that appear suddenly.

When is an output method better?

When costs do not track the work transferred, for example a contract with very uneven material costs, or a programme of identical houses where units completed are a clearer measure. Surveys of work performed, valued by a quantity surveyor, are a common output method in construction. Whichever method is chosen, it is applied consistently to similar contracts. See construction revenue over time and construction accounting.

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Questions people ask

What is the cost-to-cost method?

An input method that measures progress as costs incurred to date divided by total expected costs, applied to the contract price to recognise revenue.

How are uninstalled materials treated under the cost-to-cost method?

When they meet IFRS 15's conditions, they are excluded from progress and revenue equal to their cost is recognised, with no margin, when the client controls them.

Are inefficiency costs included in progress?

No. Wasted materials, labour and rework not reflected in the price are expensed and excluded from the measure of progress.

When should an output method be used instead?

When costs do not track the work transferred, such as contracts with uneven material costs or programmes of identical units.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

ConstructionConstruction revenue over timeConstructionConstruction accounting: the key IFRS issuesIFRS 15Revenue over time or at a point in time under IFRS 15

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This guide is general information. It is not tax or legal advice for your situation.