Multi-phase construction projects are increasingly common; a single development might unfold across site work, vertical construction, and finish-out phases spanning several years. For contractors and the CPAs who audit and advise them, a critical question arises before the first line of the work-in-progress (WIP) schedule is ever populated: should phased contracts be tracked as one job or several on the WIP schedule? Under Accounting Standards Codification Topic 606 (ASC 606), Revenue from Contracts with Customers, this is not a matter of preference. It is an accounting determination that often requires significant judgment and directly shapes how percentage-of-completion, overbillings and underbillings, and gross profit are calculated and presented.
ASC 606-10-25-9 requires an entity to combine two or more contracts entered into at or near the same time with the same customer (or related parties) into a single unit of account if any one of three criteria is met:
If any criterion is satisfied, combining is mandatory. This determination has direct financial implications. When phased contracts are combined, only one contract asset or liability is reported for the combined arrangement, and an overall loss is only recognized if the combined contract is expected to be unprofitable, even if one phase, viewed in isolation, would otherwise show a loss. Practically, that means the WIP schedule should reflect a single job line with combined contract value, combined estimated cost, and a combined percentage-of-completion, rather than separate lines that may not accurately reflect the overall job position and profitability of the combined contract.
Meeting the “same time, same customer” criteria is only the first step; ASC 606 still requires an analysis of whether the promised goods and services form one performance obligation or several. A promised good or service is distinct, and therefore a separate performance obligation, only if the customer can benefit from it on its own (or with other readily available resources) and the promised good or service is separately identifiable from other promises in the contract. Determining whether a promise is separately identifiable requires evaluating whether the contractor is integrating the item into a combined output, whether it significantly modifies other promised items, and whether it is highly interdependent with other contract scope.
Consider a general contractor awarded two contracts, bid concurrently with the same customer, for a three-phase mixed-use development. The first contract is for site work and infrastructure (Phase 1) and a retail mall build-out (Phase 2). The second contract is for a residential/office component (Phase 3).
Although the customer may benefit from each component of the development individually, that alone does not mean each component is a separate performance obligation. The contractor must also consider whether the promised goods and services are distinct within the context of the overall arrangement. From the customer’s perspective, the retail mall, apartments, offices, and related improvements are highly interdependent elements of a single, integrated development. Because the contractor is combining these elements to deliver the completed development envisioned by the customer, the individual components are likely not separately identifiable under ASC 606. Accordingly, the contracts would generally be combined and accounted for as a single performance obligation, resulting in one line on the WIP schedule.
Change the facts even slightly, though, and the conclusion may change. If Phase 3 involves an unrelated customer or is negotiated well after the earlier phases are complete, the contracts would likely remain separated for accounting purposes. Each would then appear as its own line on the WIP schedule, with its own contract value, cost estimate, and percentage-of-completion.
For preparers and reviewers, a few points should inform how phased jobs are structured on the WIP schedule:
Because ASC 606 requires consideration of each arrangement’s specific facts and circumstances, contractors should prepare and retain a written evaluation of the three combining criteria for each multi-phase project. The assessment should be revisited and updated if relevant facts or contract terms change.
A change order that adds a distinct scope priced at standalone selling price may be accounted for as a separate contract and tracked separately on the WIP schedule from the existing job. Similarly, extended warranty or maintenance services may represent separate performance obligations when they are distinct from the underlying construction work.
An overarching master agreement covering multiple buildings or locations may not meet the definition of a contract under ASC 606 if pricing, scope, and commitment are not fixed until each phase is separately negotiated, in which case the contractor must evaluate each phase-specific agreement and determine whether any must be combined on the WIP.
ASC 606 does not prescribe a specific time period for determining whether contracts were entered into “at or near the same time.” Contractors should therefore establish a reasonable approach and apply it consistently to contracts with similar facts and circumstances, supporting consistent presentation across the WIP schedule.
Getting the combining analysis right at contract inception lays the foundation for an accurate WIP schedule. Contractors who treat every phase as automatically separate (or automatically combined) risk misstating job-level margins, masking loss positions, and creating disclosure and audit issues down the line. Because ASC 606 leans heavily on professional judgment, contractors should work closely with their CPA to document the analysis for each multi-phase contract and revisit it whenever contract terms, customers, or scope change.
Every phased project starts with a decision that shapes its margins for years: one job or several. GBQ Partners’ construction accounting team works alongside contractors to document the combining analysis at contract inception, structure WIP schedules that hold up at audit time, and revisit conclusions as scope, customers, or terms change. If you’re bidding or managing a multi-phase project, we’d welcome the chance to walk through your contracts with you. Empowering growth is only a conversation away. Talk to an expert on our team today.
Contracts entered into at or near the same time with the same customer (or related parties) must be combined if any one of three criteria is met: they were negotiated as a package with a single commercial objective, the price or performance of one affects the other, or the promised work forms a single performance obligation. See: FASB’s revenue recognition guidance in ASC 606.
Yes. A shared customer alone doesn’t require combining. If a later phase was negotiated well after earlier phases were complete, was priced independently, and delivers work that isn’t integrated with the other phases, the contracts may remain separate. Each would then carry its own contract value, cost estimate, and percentage-of-completion on the WIP schedule.
It depends on what the change order adds. Under ASC 606, a modification that adds distinct scope priced at its standalone selling price is generally treated as a separate contract and may be tracked as its own WIP line. Change orders that don’t meet both conditions are typically folded into the existing job and its percentage-of-completion.
Combining creates one contract value, one cost estimate, and one percentage-of-completion for the entire arrangement. That blends the margins of every phase into a single job-level result, so a lower-margin phase is measured alongside more profitable ones. Treating phases incorrectly as separate (or combined) can misstate margins, hide loss positions, and create audit issues.