REVENUE AND CONTRACT COSTS |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contractors [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| REVENUE AND CONTRACT COSTS |
REVENUE AND CONTRACT COSTS
The Company uses the percentage-of-completion accounting method for fabrication contracts. Revenue from fixed-price or unit rate contracts is recognized on the percentage-of-completion method, computed by the efforts-expended method using the percentage of labor hours incurred as compared to estimated total labor hours to complete each contract. This progress percentage is applied to our estimate of total anticipated gross profit for each contract to determine gross profit earned to date. Revenue recognized in a period for a contract is the amount of gross profit recognized for that period plus labor costs and pass-through costs incurred on the contract during the period. We define pass-through costs as material, freight, equipment rental, and sub-contractor services included in the direct costs of revenue associated with projects. Consequently, pass-through costs are included in revenue but have no impact on the gross profit realized for that particular period. Our pass-through costs as a percentage of revenue for each period presented were as follows:
Costs and estimated earnings in excess of billings on uncompleted contracts at September 30, 2016 was $18.7 million with $10.2 relating to two major customers. Billings in excess of costs and estimated earnings at September 30, 2016 was $7.2 million and included advances of $5.9 million from four major customers.
Revenues and gross profit on contracts can be significantly affected by change orders and claims that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. At September 30, 2016, we included $87,000 in revenue related to change orders on two projects which have been approved as to scope but not price. We expect to resolve these change orders before the end of the fourth quarter of 2016. During the nine months ended September 30, 2016, we recorded a loss of $358,000 for a single customer related to revenue on change orders recognized in prior periods that were not recovered in our final settlement with the customer.
During the third and fourth quarters of 2015, we recorded contract losses of $24.5 million related to a decrease in the contract price due to final weight re-measurements and our inability to recover certain costs on disputed change orders related to a large deepwater project we delivered to our customer in November 2015. No amounts with respect to these disputed change orders are included on our consolidated balance sheet or recognized in revenue in our consolidated statement of operations as of and for the three and nine months ended September 30, 2016. In the second quarter of 2016, we initiated legal action to recover our costs from these disputed change orders. We can give no assurance that our actions will be successful or that we will recover all or any portion of these contract losses from our customer.
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