Definitions of Terms

Additional asset stipulation

A special provision in a construction contract which either gives the option to the customer to require construction of an additional asset or permits amendment to the construction contract so as to include an additional asset not envisioned by the original contract should be construed as a separate construction contract when

1. The additional asset differs significantly (in design, function, or technology) from the asset(s) covered by the original contract; or

2. The extra contract price fixed for the construction of the additional asset is negotiated without regard to the original contract price.

Back charges

Billings for work performed or costs incurred by one party that, in accordance with the agreement, should have been performed or incurred by the party billed.

Billings on long-term contracts

Accumulated billings sent to the purchaser at intervals as various milestones in the project are reached.

Change orders

Modifications of an original contract that effectively change the provisions of the contract without adding new provisions; synonymous with variations.

Claims

Amounts in excess of the agreed-on contract price that a contractor seeks to collect from a customer (or another party) for customer-caused delays, errors in specifications and designs, disputed variations in contract work, or other occurrences that are alleged to be the causes of unanticipated costs.

Combining (grouping) contracts

Grouping two or more contracts, whether with a single customer or with several customers, into a single profit center for accounting purposes, provided that

1. The group of contracts is negotiated as a single package;

2. The contracts combined are so closely interrelated that, in essence, they could be considered as a single contract negotiated with an overall profit margin; and

3. The contracts combined are either executed concurrently or in a sequence.

Construction contract

Contract specifically entered into 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 their end use or purpose.

Construction-in-progress (CIP)

Inventory account used to accumulate the construction costs of the contract project. For the percentage-of-completion method, the CIP account also includes the gross profit earned to date.

Contract costs

Comprised of costs directly related to a specific contract, costs that are attributable to the contract activity in general and can be allocated to the contract, and other costs that are specifically chargeable to the customer under the terms of the contract.

Contract revenue

Comprised of initial amount of revenue stipulated by the contract plus any variations in contract work, claims, and incentive payments, provided that these extra amounts of revenue meet the recognition criteria set by the IASC's Framework (i.e., regarding the probability of future economic benefits flowing to the contractor and reliability of measurement).

Cost-plus contract

Construction contract in which the contractor is reimbursed for allowable costs plus either a percentage of these costs or a fixed fee.

Cost-to-cost method

Percentage-of-completion method used to determine the extent of progress toward completion on a contract. The ratio of costs incurred through the end of the current year divided by the total estimated costs of the project is used to recognize income.

Estimated cost to complete

Anticipated additional cost of materials, labor, subcontracting costs, and indirect costs (overhead) required to complete a project at a scheduled time.

Fixed-price contract

Construction contract wherein the contract revenue is fixed either in absolute terms or is fixed in terms of unit rate of output; in certain cases both fixed prices being subject to any cost escalation clauses, if allowed by the contract.

Incentive payments

Any additional amounts payable to the contractor if specified performance standards are either met or surpassed.

Percentage-of-completion method

Method of accounting that recognizes income on a contract as work progresses by matching contract revenue with contract costs incurred, based on the proportion of work completed. However, any expected loss, which is the excess of total incurred and expected contract costs over the total contract revenue, is recognized immediately, irrespective of the stage of completion of the contract.

Precontract costs

Costs that are related directly to a contract and are incurred in securing a contract (e.g., architectural designs, purchase of special equipment, engineering fees, and start-up costs). They are included as part of contract costs if they can be identified separately and measured reliably and it is probable that the contract will be obtained.

Profit center

Unit for the accumulation of revenues and cost for the measurement of income.

Segmenting contracts

Dividing a single contract, which covers the construction of a number of assets, into two or more profit centers for accounting purposes, provided that

1. Separate proposals were submitted for each of the assets that are the subject matter of the single contract

2. The construction of each asset was the subject of separate negotiation wherein both the contractor and the customer were in a position to either accept or reject part of the contract pertaining to a single asset (out of numerous assets contemplated by the contract)

3. The costs and revenues pertaining to each individual asset can be separately identified

Stage of completion

Proportion of the contract work completed, which may be determined using one of several methods that reliably measures it, including

1. Percentage-of-completion method

2. Surveys of work performed

3. Physical proportion of contract work completed

Subcontractor

Second-level contractor who enters into a contract with a prime contractor to perform a specific part or phase of a construction project.

Substantial completion

Point at which the major work on a contract is completed and only insignificant costs and potential risks remain.

Variation

Instruction by the customer for a change in the scope of the work envisioned by the construction contract.