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 pass-through costs incurred 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 50.9% and 53.1% for the three-month periods ended June 30, 2014 and 2013, respectively. Pass-through costs as a percentage of revenue were 50.1% and 54.7% for the six-month periods ended June 30, 2014 and 2013, respectively.

Costs and estimated earnings in excess of billings on uncompleted contracts include unbilled costs of $5.5 million relating to three major customers. Billings in excess of costs and estimated earnings include advances of $12.7 million from three major customers.

The Company recorded losses of $3.7 million and $4.7 million for the three-month and six-month periods ended June 30, 2014, respectively, for certain marine projects.

At June 30, 2014, we recorded revenue totaling $5.2 million related to certain change orders on three projects which have been approved as to scope but not price. We expect to resolve these change orders in the third quarter of 2014. At June 30, 2013, 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. All unapproved items as of June 30, 2013 have been subsequently approved in the normal course of business.