AFAR: A Fastrack of Long-Term Contracts

LONG-TERM CONTRACTS (A QuickNotes)

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design technology, and function or ultimate use or purpose.


Types of Construction Contract
1.       Fixed price Contract
·         Agreed to a fixed price
·         Subject to cost escalation clauses
2.       Cost Plus Contract
·         Reimbursed for allowed or otherwise defined costs plus a % of these costs or a fixed fee.
Construction Revenue- the total amount of consideration receivable under the contract.
Variation- instruction by the customers for a change in the scope of the work to be performed under the contract.
Incentive Payment- additional amounts paid to the contractor are specified to be met or exceeded.
Claims- an amount that the contractor seeks to collect from the customers or another party as reimbursement for costs not included in the contract price.
Construction Contracts
·         relate directly to the specific contract
·         Are attributable to contract activity in general and can be allocated to the contract.
·         Chargeable to the customers
The cost that are direct:
1.       Site labor costs
2.       Materials used
3.       Depreciation
4.       Moving PPE
5.       Hiring PPE
6.       Design and technical assistance
7.       Rectification and guarantee work
8.       Claims from third parties

A.      %-Completion Method
·         An application of the accrual assumption
·         Avoids the mismatch between costs being recognized as they are incurred and revenue only being recognized when the contracts are completed.
I.                    Input Measures
·         Based on an established or assumed relationship between a unit of input and productivity.
a.       Cost-to-cost method- degree of completion is determined by comparing costs already incurred with the most recent estimates of total costs expected to complete the project.
b.      Effort-expended Method- based on some measure of work performed.
II.                  Output measures- are measured in terms of results achieved. It was based on units produced.
Percentage Completion Method: AFAR: A Fastrack of Long-Term Contracts

Percentage of Completion Method: AFAR: A Fastrack of Long-Term Contracts



Financial Statement Presentation


Current Assets. Gross Amount due from Customers- It comprises the total cost incurred on the contract + cumulative recognized profit less progress billings
Current Liability. Gross Amount due to Customers- Progress Billings less total Cost incurred in the contract + cumulative recognized profit
Cost-Recovery Method
1.       Recognize Revenue only to the extent of contract costs incurred in which are expected to be recoverable;
2.       Recognize contract costs as an expense in the period they are incurred.

Financial Statements Presentations
Current Assets- Total costs incurred on the contract, less progress billings
Current Liability- Progress Billings less total cost incurred on the contract
General Administrative Expense- change to income in the period when they occur.
Contract Retention- guarantee the completion of the contract in satisfying manner (Current Assets)
AFAR: A Fastrack of Long-Term Contracts


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