Understanding Pre-Contract Costs Under the New Revenue Standard

Pre-contract costs are costs to obtain or fulfill a contract that are incurred prior to the transfer of control to the customer and are subject to review for capitalization.  There are specific criteria (not covered in this article) that are used to determine if capitalization of the costs is appropriate.  Common pre-contract costs include:

• Insurance/bonding.
• Mobilization costs of equipment and labor to and from the job sites.
• Engineering and Design on the basis of commitments.
• Costs for production equipment and material relating to specific anticipated contracts (Costs for purchase of equipment, material or supplies).
• Commissions.

These costs are capitalized on the balance sheet and amortized into the contract over the life of the contract in accordance with the percentage of completion on the contract.

Obviously, materiality and practicality come into play when applying this part of the new standard.  If you incur a significant bond 2 days before your year end, you will most likely need to capitalize that cost on your balance sheet at the end of the year.  If that contract is completed in the subsequent year, and the users of interim internal financial statements don’t care about the minutia of the job costs, you could write this cost into the job however you want during the subsequent year.  If the contract will span multiple years with significant progress in each of them, you probably need to properly implement this part of the standard and amortize these costs in proportion to percentage of completion over the contract life.

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 understand how to implement this area, click here to view helpful questions to get you started.