Low-Rise Office Building
The initial contract was signed on January 5, 2010 in the amount of $1,000,000. This amount included $800,000 for construction costs, $150,000 for overhead mark-up, and $50,000 for profit markup. The contractor broke ground on February 4, 2010. During the course of construction the client decided to upgrade the quality of the lighting and plumbing fixtures, resulting in a change order issued to the contractor in the amount of $100,000 on October 7, 2010. The change order price was calculated by the contractor as follows: $50,000 construction costs, $37,500 overhead markup, $12,500 profit markup.
At the end of 2010, construction was not complete. However, the client was renting out office space to other entities as well as using some of the offices for the client’s own business entity. Work remaining as of December 31, 2010 included surfacing the parking lot, erecting a portable parking attendant’s station, miscellaneous site concrete work and landscaping. This work was schedule to be completed by May 1, 2010, weather permitting.
A summary of accounting data as of December 31, 2010 included total construction costs in the amount of $800,000 for which $600,000 was paid. The balance reflected unpaid bills for the month of December, and retention withheld on subcontracts throughout the course of the project. The total progress billing as of December 31, 2010 was $1,000,000 of which $900,000 was collected with the balance outstanding as retention receivable. The project manager estimated that given the work left to be completed, approximately $200,000 of construction cost would be incurred.
1. Calculate the percent complete for Project 101 for the period ending 12/31/2010. Then, determine the earned revenue and gross profit by applying the percentage of completion method for recognizing revenue.
2. Calculate the revenue and gross profit for Project 101 for the period ending 12/31/2010 by applying the billings method for recognizing revenue. Compare the revenue value with the value when using the percentage of completion method. Comment on the contractor’s billing practice.