When a cost incurred does not contribute to progress in satisfying the performance obligation, the cost needs to be accounted for separately.   It would be considered a period cost and would impact the bottom line in the year the waste and inefficiencies occurred.

Things to consider when a cost incurred does not contribute in satisfying the performance obligation:

  • Costs incurred related to rework or wasted materials would be excluded from input measurement, as these costs do not represent the transfer of goods or services to the customer.
  • Significant inefficiencies in the contractor’s performance that were not reflected in the contract price.

Obviously, materiality and practicality come into play when applying this part of the new standard.  You must encounter significant redo work.  For instance, you install all of the wrong fixtures in a building and have to remove them and reinstall the correct ones, that rework may be considered significant waste and inefficiency.  Please note that normal inefficiencies that occur are not included as a part of this guidance.  If you budgeted 1000 hours and are encountering 1500 hours due to poor project management or other inefficiencies, the additional hours are not considered in this guidance.

Below is an illustration of how waste and inefficiencies should be handled on the job cost schedules for jobs in process:

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