Understanding Pre-Contract Costs Under the New Revenue Standard May 7, 2019 By: Claudia R. Wolter 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. Article by: Claudia R. Wolter Claudia Wolter, a Shareholder with KatzAbosch, joined the firm in 1988. She has played a major role in leading the firm into the 21st century with cutting edge initiatives, including the transition to and managing of a paperless environment. She serves as Co-Chair of the firm’s Accounting and Auditing Services Group, assists in the quality control management and oversight of the firm and is a member of the Construction and Real Estate Services Group. Most recently, Claudia served as a contributing author of “Construction Accounting,” an in-depth guide to construction financial and accounting issues for attorneys distributed by the American Bar Association. A dedicated professional, Claudia holds the prestigious distinction of Certified Construction Industry Financial Professional (CCIFP), a certification held by less than 50 professionals in Maryland and less than 1000 professionals in the United States, the designation of Certified Construction Auditor (CCA) from the National Association of Construction Auditors (NACA) and a Lean Six Sigma CPA Green Belt certification from Ohio State University ATI and Boomer Consulting, Inc.
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