Note 16 - Accounting for Claims, Unapproved Change Orders and Incentives on Long-Term Construction Contracts
 3 Months Ended
Nov. 30, 2011
Long-term Contracts or Programs Disclosure [Text Block]
Note 16 —Accounting for Claims, Unapproved Change Orders and Incentives on Long-Term Construction Contracts

Claims include amounts in excess of the original contract price (as it may be adjusted for approved change orders) that we seek to collect from our clients for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs and are included in estimated revenues when recovery of the amounts is probable and the costs can be reasonably estimated. Backcharges and claims against vendors, subcontractors and others are included in our cost estimates as a reduction in total estimated costs when recovery of the amounts is probable and the costs can be reasonably estimated. Profit recognition on our claims is deferred until the change order has been approved or the disputed amounts have been settled. The recording of these claims against third parties increases gross profit or reduces gross loss on the related projects in the periods the claims are reported. Claims receivable are included in costs and estimated earnings in excess of billings on uncompleted contracts on the accompanying consolidated balance sheets.

We enter into cost-reimbursable arrangements in which the final outcome or overall estimate at completion may be materially different than the original contract estimated value. While the terms of such contracts indicate costs are to be reimbursed by our clients, we typically process change notice requests to document agreement as to scope and price. Due to the nature of these items, we have not classified and disclosed the amounts as unapproved change orders. While we have no history of significant losses on this type of work, potential exposure exists relative to costs incurred in excess of agreed upon contract value.

Unapproved Change Orders and Claims

The table below (in millions) summarizes information related to our significant unapproved change orders and claims from project owners that we have recorded on a total project basis at November 30, 2011, and November 30, 2010, and excludes all unrecorded amounts and non-significant unapproved change orders and claims.

   
Fiscal Year
2012
   
Fiscal Year
2011
 
Amounts included in project estimates-at-completion at September 1
  $ 448.3     $ 111.6  
Changes in estimates-at-completion
    9.6       (15.0 )
Approved by clients
    (8.7 )     (41.8 )
Amounts included in project estimates-at-completion at November 30
    for unapproved change orders and claims
  $ 449.2     $ 54.8  
Amounts recorded in revenues (or reductions to contract costs) on a
    percentage-of-completion  basis at November 30
  $ 116.6     $ 40.4  

In the table above, the difference between the amounts included in project estimates-at-completion and the amounts recorded in revenues (or reductions to contract costs) on a total project basis represents the forecasted costs for work which has not yet been incurred (i.e. the remaining percentage-of-completion revenue to be recognized on the related project). The amounts presented in this table include, but are not limited to, those matters currently in litigation or arbitration for which we have recorded revenue. Additional discussion regarding our legal proceedings relating to unapproved change orders and claims in litigation or arbitration is provided in our Legal Proceedings in Note 12 — Contingencies and Commitments.

Unapproved change orders and claims included in project estimates-at-completion (EAC) remained relatively flat during the three months ended November 30, 2011. The majority of the amounts included in the estimates-at-completion in the table above relates to engineering, equipment supply, material fabrication, and construction cost estimates which may exceed $400 million associated with regulatory mandated design changes resulting from the certification of the AP1000 nuclear power plant technology in the United States and our clients’ application to obtain combined operating licenses (COLs) for four nuclear power reactors. We perform much of the modular fabrication, assembly and construction related activities on these projects with WEC being responsible for the nuclear island engineering and equipment supply. We believe that we have contractual entitlement to recover the additional costs related to these design changes from our clients and to the extent not paid by clients, WEC has acknowledged an obligation to reimburse us for our material and fabrication costs. Final terms are currently being negotiated with WEC, and the regulatory approvals have not yet been finalized. Therefore, the design and cost estimates are subject to change. Change order requests or claims have not been completed or submitted to the respective clients or to WEC. We have an understanding with WEC regarding these additional costs which will be followed up with formal amendments to the existing consortium agreement between us. It is expected that the cost estimates will continue to be refined as more information becomes available. These projects have a long construction duration and it is possible that these matters may not be resolved in the near term. Should these matters proceed to formal dispute resolution, our contracts call for clients to co-fund our costs until the matters are resolved.

During the three months ended November 30, 2011, our clients approved change orders totaling $8.7 million.

If we collect amounts different than the amounts that we have recorded as unapproved change orders/claims receivable, that difference will be reflected in the EAC used in determining contract profit or loss. Timing of claim collections is uncertain and depends on such items as regulatory approvals, negotiated settlements, trial date scheduling and other dispute resolution processes pursuant to the contracts. As a result, we may not collect our unapproved change orders/claims receivable within the next twelve months.

In addition to the unapproved change orders and claims discussed above, we have recorded as a reduction to costs at November 30, 2011, approximately $0.7 million in expected recoveries for backcharges, liquidated damages and other cost exposures resulting from supplier or subcontractor caused impediments to our work. Such impediments may be caused by the failure of suppliers or subcontractors to provide services, materials, or equipment compliant with provisions of our agreements, resulting in delays to our work or additional costs to remedy. See Note 12 — Contingencies and Commitments for information with respect to certain vendor backcharges.

In the ordinary course of business, the Company enters into various agreements pending assurances and guarantees to clients.  While in most cases these performance risks are offset by similar guarantees by our suppliers, there are instances where the full extent of the exposure is not eliminated.

Should we not prevail in these matters, the outcome could have an adverse effect on our statements of operations and statement of cash flows.

Project Incentives

Some of our contracts contain performance incentive and award fee arrangements (collectively referred to as project incentives) that provide for increasing or decreasing revenue based upon the achievement of some measure of contract performance in relation to agreed upon targets. Project incentives can occur in all segments, but the majority of contracts containing project incentives are in our Plant Services and E&I segments. Therefore, the gross profit in those segments may be significantly influenced by these project incentives.

We include in our EAC revenue an estimate of the probable amounts of these project incentives we expect to earn if we achieve the agreed-upon criteria. We recognize revenue associated with these project incentives using the percentage-of-completion method of accounting. As the contract progresses and more information becomes available, the estimate of the anticipated incentive fee that will be earned is revised as necessary.

At November 30, 2011, and August 31, 2011, our project EACs included approximately $115.9 million and $109.0 million, respectively, related to estimates of amounts we expect to earn on incentive fee arrangement. On a percentage-of-completion basis, we have recorded $79.1 million and $64.8 million as of November 30, 2011, and August 31, 2011, respectively, of these estimated amounts in revenues for the related contracts. We bill incentive fees based on the terms and conditions of the individual contracts which may allow billing over the performance period of the contract or only after the target criterion has been achieved. Incentive fees which have been recognized but not billed are included in costs and estimated earnings in excess of billings on uncompleted contracts in the accompanying consolidated balance sheets. If we do not achieve the criteria at the amounts we have estimated, project revenues and profit may be materially reduced.