NOTE 5 – CONTRACT COSTS

We define pass-through costs as material, freight, equipment rental, and sub-contractor services included in the direct costs of revenue associated with projects.

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 which measures the percentage of labor hours incurred to date as compared to estimated total labor hours for 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 earned for that period plus pass-through costs incurred on the contract during the period. Consequently, pass-through costs have little or no impact in the determination of gross margin for a particular period.

Pass-through costs as a percentage of revenue were 59.4% and 58.2% for the three-month periods ended September 30, 2013 and 2012, respectively. Pass-through costs as a percentage of revenue were 57.1% and 46.0% for the nine-month periods ended September 30, 2013 and 2012, respectively.

There were no prepaid subcontract costs as of September 30, 2013 and $33.1 million as of December 31, 2012. These costs represent uninstalled materials purchased using customer funds, and are recognized as pass-through costs in the periods the materials are installed.

Costs and estimated earnings in excess of billings on uncompleted contracts include unbilled costs of $66.1 million to three major customers. Billings in excess of costs and estimated earnings include advances of $34.9 million from five major customers.

At September 30, 2013, we recorded revenue totaling $3.9 million related to certain change orders on two projects which have been approved as to scope but not price. We expect to resolve these change orders in the fourth quarter of 2013. At September 30, 2012, we recorded revenue totaling $1.7 million related to certain change orders on two projects that had been approved as to scope but not price.