REVENUE AND CONTRACT COSTS |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||
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| REVENUE AND CONTRACT COSTS |
REVENUE AND CONTRACT COSTS
The Company uses the percentage-of-completion accounting method to recognize revenue from fixed-price and unit-rate contracts computed using the percentage of labor hours incurred as compared to estimated total labor hours to complete each contract. Revenue recognized in a period for a contract is the pro rata portion of the contract value based upon the labor hours incurred to the total labor hours estimated to complete the contract plus pass-through costs incurred during the period. We define pass-through costs as material, freight, equipment rental, and sub-contractor services that are 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:
Contracts in progress at September 30, 2017, were $42.8 million with $31.7 million relating to two major customers. Advance billings on contracts at September 30, 2017, was $4.4 million and included advances of $3.2 million from two major customers. Accrued contract losses were $2.0 million and $387,000 as of September 30, 2017 and December 31, 2016 , respectively. Our accrued contract losses as of September 30, 2017, are a result of changes in estimates totaling $12.7 million identified during the nine months ended September 30, 2017, due to cost overruns and re-work related to two vessels we are constructing for a major customer in our Shipyards division.
Revenue 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, 2017, we included no amounts in revenue related to change orders on projects which have been approved as to scope but not price. During the nine months ended September 30, 2016, we recorded a loss of $488,000 for a single customer related to revenue on change orders recognized in prior periods that were not recovered.
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