CONTRACT REVENUE AND PERCENTAGE-OF-COMPLETION METHOD |
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| Revenue Recognition [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CONTRACT REVENUE AND PERCENTAGE-OF-COMPLETION METHOD |
CONTRACT REVENUE AND PERCENTAGE-OF-COMPLETION METHOD
Information with respect to uncompleted contracts as of December 31, is as follows (in thousands):
The above amounts are included in the accompanying consolidated balance sheets at December 31, under the following captions (in thousands):
Provision for Estimated Losses
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. We recognized contract losses of $36.5 million, $1.8 million and $33.9 million in the years ended December 31, 2017, 2016, and 2015, respectively.
Contract losses for the year ended December 31, 2017, totaling $34.5 million related to cost overruns and delays that we encountered in the newbuild construction of two multi-purpose service vessels that we are building for a customer within our Shipyard Division. These vessels are some of the most technologically-advanced vessels in their class. The cost overruns relate primarily to complexities with the installation of the power and communications systems. We believe the best course of action for the Company is to perform additional engineering and construction planning to ensure we are meeting the contractual performance requirements for these vessels and mitigating any further construction risk. With the additional electrical engineering, planning and construction estimates, the estimated delivery dates of the vessels will be extended beyond the contractual delivery dates, and we estimate that the maximum amount of liquidated damages of $11.2 million will be incurred in the absence of a signed amendment with the customer. We have included the maximum liquidated damages in our 2017 loss provision above and reduced our estimate of the contract price. We continue to work with the customer to complete the contract in a manner that is acceptable to both parties; however, resolution with this customer could take several months. We can provide no assurance that we will be successful in signing an amendment to the contract, or that in the event we are successful in negotiating an amendment, as to when such an amendment will be signed or if such amendment will result in recovery of any cost overruns or liquidated damages that we have recognized to date. We believe that our estimates to complete the vessels are reasonable; however, we cannot guarantee that we will not incur additional costs as we negotiate with our customer.
Contract losses for the year ended December 31, 2016, were primarily attributable to decreasing margins on fabrication work due to continued depressed oil and gas prices within our Fabrication Division and the movement of vessels in progress from our leased Prospect Shipyard to our owned Houma Shipyard within our Shipyard Division. Contract losses for the year ended December 31, 2015, were primarily due to $24.5 million related to a decrease in the contract price due to final weight re-measurements and our inability to recover certain costs on disputed change orders related to a large deepwater project which was delivered in 2015. In addition, we increased accrued contract losses associated with our remaining contracts by approximately $9.4 million during 2015 due to increases in our projected unit labor rates of our fabrication facilities.
Revenue from Major Customers
The Company is not dependent on any one customer, and the revenue earned from each customer varies from year to year based on the contracts awarded; however, the Company is highly dependent on a few large customers in each year, particularly customers for our major deepwater projects, as shown below. Revenue from customers comprising 10% or more of the Company’s total revenue for the years ended December 31, 2017, 2016 and 2015, respectively, are summarized as follows (in thousands):
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* The customer revenue was less than 10% of the total revenue for the year.
Implementation of ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606)
As discussed in Note 1, Implementation of this new standard will be required effective January 1, 2018. Topic 606 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As part of our implementation of this standard, we established an implementation team as well as employed the help of outside consultants to assist with the implementation. Our evaluation concluded revenue from our fixed-price and unit-rate contracts using the percentage-of-completion method, computed by measuring the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract is still appropriate. Revenue from contracts that are based upon time worked and materials incurred at the contracted rates will still be recognized as the work is performed and the costs are incurred. Our implementation included a detailed review of all or our significant contracts. In doing so, we determined that certain contracts will need to include contract labor amounts within the calculation of percentage complete in order to comply with the additional criteria included within Topic 606. Additionally, we concluded that significant costs from outside services will need to be included within our measure of progress and and include a measure of profit and not treated solely as "pass-through costs." While these additional criteria impact the timing of revenue recognition, they do not change the timing for the recognition of costs.
The guidance permits companies to either apply the new requirements retrospectively to all prior periods presented through use of the full retrospective method or apply the new requirements in the year of adoption through a cumulative adjustment using the modified retrospective method. We will adopt the new revenue guidance effective January 1, 2018, by recognizing the cumulative effect of initially applying the new standard as a change in the opening balance of retained earnings. We expect this adjustment to our retained earnings to be immaterial as of December 31, 2017.
International Revenue
The Company’s fabricated structures are used worldwide by U.S. customers operating abroad and by foreign customers. Revenue related to fabricated structures for delivery outside of the United States accounted for 0%, 14%, and 6% of the Company’s revenue for the years ended December 31, 2017, 2016 and 2015, respectively, and are summarized as follows (in thousands):
Contract Costs
Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies and tools. Also included in contract costs are a portion of those indirect contract costs related to plant capacity, such as depreciation, insurance and repairs and maintenance. These indirect costs are allocated to jobs based on actual direct labor hours incurred.
We define pass-through costs as material, freight, equipment rental, and sub-contractor services included in the direct costs of revenue associated with projects. Pass-through costs have no impact in the determination of gross margin recognized for the related project for a particular period. Pass-through costs as a percentage of revenue were 53.1%, 36.5% and 44.4% for the years ended December 31, 2017, 2016 and 2015, respectively.
Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under those provisions. Those contracts define the conditions under which our customers may make claims against us for liquidated damages. As of December 31 2017, we estimated that the delivery dates for the newbuild construction of two multi-purpose service vessels that we are building for a customer within our Shipyard Division will be extended beyond the contractual delivery dates, and that the maximum amount of liquidated damages of $11.2 million will be assessed in the absence of a signed amendment with the customer as discussed above. Additionally, we successfully resolved our dispute with a customer within our Shipyard Division that had previously rejected delivery of the first of two offshore service vessels that we completed and tendered for delivery on February 6, 2017. During the fourth quarter of 2017, we settled our disputes, and the customer accepted delivery of the first of two vessels less a reduction in the amounts owed under each contract of $233,000 related to discrepancies of dead weight tonnage. We also recommenced construction of the second vessel to be delivered in 2018.
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