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 on the gross profit recognized on a project for that particular period.

Pass-through costs as a percentage of revenue were 42.6% and 59.4% for the three-month periods ended September 30, 2014 and 2013, respectively. Pass-through costs as a percentage of revenue were 47.8% and 57.1% for the nine-month periods ended September 30, 2014 and 2013, respectively.

Costs and estimated earnings in excess of billings on uncompleted contracts include unbilled costs of $9.3 million relating to three major customers. Billings in excess of costs and estimated earnings include advances of $14.2 million from three major customers.

The Company recorded losses of $0.3 million and $5.1 million for the three-month and nine-month periods ended September 30, 2014, respectively, for certain marine projects.

During the quarter ended September 30, 2014, we recorded revenue totaling $0.3 million related to certain change orders on one project which has been approved as to scope but not price. We expect to resolve this change order in the fourth quarter of 2014. At September 30, 2013, we recorded revenue totaling $3.9 million related to certain change orders on two projects that were approved as to scope but not price, all of which were subsequently approved in the normal course of business.