NET PROFIT FOR PERIOD REQUIRED TO COMPLETE CONTRACTS ON HAND Month of October 31, 1922 Statement C Form 26. Statement of Uncompleted Contracts (Statement C) CONTRACTS INCLUDED While the forms are referred to herein as statements of uncompleted contracts, the statements contain the details of contracts completed during the fiscal period. They include all contracts on which any work was performed from the beginning to the end of a fiscal period. "Work performed during the fiscal period" is not intended to include small amounts expended to complete (either physically or financially) a contract on which practically the entire profit was taken up in Profit and Loss account at the close of the preceding fiscal year. Such relatively minor amounts are not large enough, when compared with the totals of contracts, to justify including them in the volume of business, particularly as a practice of so doing would not only entail a very long statement, but would include disbursements made in one period, the profit on which had been absorbed in the preceding one. If, at the end of any fiscal period, a contract is partially completed and part of the profit or loss thereon has been taken up on the books, and credited or charged to the Profit and Loss account, the uncompleted part of the contract, together with the profit thereon, is all need be included in the statement of the next succeeding fiscal period when statement A (Form 24) is used. Assume that a contractor has a $3,000,000 contract, on which the profit at closing time seems to be $250,000. At that time he has billed to the owner $1,800,000, or 60% of the contract. He feels justified in taking up 60%, or $150,000, of the final profit. The statement of uncompleted contracts for the subsequent period would show the amount of uncompleted work on that contract as $1,200,000, and the profit thereon as $100,000. If it is desired to have the statement show not only the volume of business and estimated profit for the current fiscal period but also the full amount of the contract and the profit for the entire job, the latter figures can be entered in the proper columns and the volume of work completed to the end of the preceding fiscal year, with the profit thereon, indicated in red and deducted when adding the columns so that the net totals will represent business and profit on the current fiscal period. If statement B (Form 25) is used, V5 would show the $3,000,000 and V6 the $1,800,000 mentioned above, while P4 would read $250,000 and P5 $150,000. CHAPTER XV FINANCIAL STATEMENT PROFIT AND LOSS STATEMENT Determination of Profits While a contractor may have other income, the principal source from which his profits are derived is construction work. The statement of uncompleted contracts can only be taken as a guide in ascertaining profits and losses on contracts. The determination of profits for the purpose of making book entries, the payment of taxes, and the declaration of dividends requires a supplemental and independent check of the profits indicated by the statement of uncompleted contracts. It must be borne in mind that this statement is simply a monthly approximation of the result of conducting operations. The check which is supplemental to the result indicated by cost reports is a tabulation of probable ultimate cost, which includes: 1. Expenditures for cost of construction, as shown by the general ledger account for each operation. 2. An amount to cover the cost of completing work to be performed by mechanics and laborers engaged directly by the contractor, this amount to be inclusive of both the wages of the mechanics and laborers and the value of materials used by them. 3. The value of work still to be performed by subcontractors. This value is the difference between the amount that has been included in the cost of construction for work completed by subcontractors and the total of all contracts and orders issued to subcontractors. It is represented by the remainder, obtained by deducting the “Work Done" column from the total of the memorandum account with each subcontractor (Form 21, page 149). 4. An amount to provide for further cost on subcontract work, due to claims, or work performed by them for which no formal order has been issued and the value of which is, therefore, not included in preceding item. 5. A sum to cover any charges in accounts receivable ledger or any other charges which have been credited to the cost of construction but may be doubtful of collection. 6. An amount to cover any contingent liability the contractor may have arising from a suit for infringement of patents or from any other cause. 7. An allowance to cover any expenditures the contractor may have to make in connection with the work of a subcontractor who may have become financially embarrassed or whose work has to be completed by the contractor. This sum should take into consideration any amount recoverable from a surety. 8. Provision for the difference between the real and par value of any securities accepted or to be accepted by the con tractor from the owner in partial settlement of the contract price. If these figures are carefully prepared, their sum will practically constitute the final actual cost to the contractor of the work to be done. The contractor's final profit will be the remainder, obtained by deducting this sum from the total amount to be received from the owner. The sum to be so received should be based on: 1. Total of payments received. 2. The balance collectible from the owner as represented by the difference between collections made and the total of the contract and accepted orders. 3. The additional amount which may be collectible from an owner in connection with work performed but not included in item 2. This applies principally to work done on a time-and-material basis. The order establishing the value of such work is not given until all labor and material have been furnished. 4. Any further adjustment of the amount the contractor is to receive from the owner either as a bonus for early completion, a participation in the savings effected, or any sum he may be compelled to pay the owner as liquidated damages through non-completion on contract time. The profit as indicated by this calculation should be reconciled with the result shown by the cost reports. The profit to be taken up on the books should be calculated on the basis of that proportion of the final profit on each job which is represented by the relation of work completed to date to the total work to be performed under the contract. Contracts on Which Profits Are Determinable If the contract under consideration is a cost-plus contract without any provision for a guaranteed maximum price to be paid by the owner to the contractor, profit must be considered as having been earned, regardless of the stage of the work. If an owner simply agrees with the contractor that he will pay the actual cost plus 10%, without limiting the amount to be paid by him, the contractor earns his 10% whenever he furnishes labor or material. He has earned $10 on the first payroll of $100 as soon as the mechanics have earned their wages. The fee so earned is reducible only by any outlays of the contractor for which he will not be reimbursed by the owner and which he is to pay out of his fee. The author believes that no great justification exists for claiming that a fee earned to the end of a fiscal period should be reduced by contingent losses that may be sustained from causes arising months afterward. What position would a contractor take under this form of contract as to the amount of fee he had |