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 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 cost incurred, including pass-through costs on the contract during the period. Consequently, pass-through costs are included in revenue but have no impact in the determination of gross profit for a particular period.

Pass-through costs as a percentage of revenue were 68.9% and 56.3% for the three-month periods ended March 31, 2014 and 2013, respectively.

Costs and estimated earnings in excess of billings on uncompleted contracts include unbilled costs of $14.3 million relating to two major customers. Billings in excess of costs and estimated earnings include advances of $20.9 million from three major customers.

At March 31, 2014, we recorded revenue totaling $5.0 million related to certain change orders on seven projects which have been approved as to scope but not price. We expect to resolve these change orders in the second quarter of 2014. At March 31, 2013, we recorded revenue totaling $4.8 million related to certain change orders on three projects that had been approved as to scope but not price. All unapproved items as of March 31, 2013 have been subsequently approved in the normal course of business.