Determining Performance Obligations Under the New Revenue Standard

One of the most challenging parts of the new standards may be determining how many performance obligations you have.  Where you previously had more than one “contract” on your job cost schedule, you may now have one.  Conversely, you may have previously reported one contract, but under the new standard, it needs to be split into more than one “performance obligation”.

The new guidance requires two or more contracts to be combined if the contracts are entered into at or near the same time with the same customer and one or more of the following conditions are met:

  • The contracts are negotiated with a single commercial objective.
  • The amount of consideration in one contract depends on the other contract.
  • The goods or service are a single performance obligation.

Conversely, a single contract may have more than one performance obligation if the customer is receiving a stand-alone benefit which is distinct in the context of the contract.  If the customer can benefit from the good or service on its own or together with other resources readily available to the customer or the customer can use good or service with other readily available resources, there would be separate performance obligations.

Most of the examples that exist for Design Build contracts show a DB contract as one performance obligation.  The two services are typically considered integrated enough to be one obligation.  However, you will typically have multiple performance obligations in Design Build Operate Maintain contracts.  The “operate” and “maintain” portions are usually distinct enough, that they need to be separated into separate performance obligations.

KatzAbosch has individuals experienced in contractor issues and trained in process improvement using lean six sigma principles that can help you through this transition.  Ready to implement your new performance obligations? Click here to review six questions to ask yourself to help illustrate your company’s implementation preparedness in this area.

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