actually earned, if the owner abandoned the work on the last day of the contractor's fiscal period? The term, "fee actually earned," is not to be confused with the claim for damages which the contractor would have against the owner as a result of being deprived of the opportunity to earn "possible profits."

Cost-plus contracts containing a guaranteed maximum price to the owner, unit-price contracts, and lump-sum contracts are subject to like conditions governing the determination of profits and will therefore be considered as one.

In deciding whether any profit on individual contracts of these classes can be taken up on the books, careful consideration must be given to the risk of construction losses in completing the unfinished portion of the contract. The work unfinished will be performed either by subcontractors or by mechanics and laborers employed by the contractor. Very little risk of loss exists in connection with the work to be done by subcontractors. The amount chargeable to the cost of construction is largely limited by the amount of the contracts and orders issued to them. The possibility of the cost to the contractor exceeding the amount of these agreed-upon prices is mainly contingent upon the subcontractor's getting into financial difficulties or for other reasons being unable to complete his contract and thereby requiring the contractor to take over and complete his work. If the expenditures so made by the contractor were added to the sums previously paid to the subcontractor, the total might be an amount greater than the sum of the subcontract and extra orders. While this condition can occur, it is academic and not representative of a loss if the subcontractor has furnished a surety bond in sufficient amount. Other contingencies may result which could reduce the contractor's profit, such as the payment of overtime to a subcontractor when it results from conditions for which he is not responsible.

The work which will be performed by the contractor's

mechanics and laborers, such as brickwork, carpentry, etc., must be carefully analyzed to see if the cost of finishing it will involve an actual cost greater than the cost estimated therefor. Actual performance may develop that brickwork cannot be done for the amount estimated, or the reverse may be true. It would be unwise to consider a profit earned and entirely ignore the fact that losses will actually take place in the completion of unfinished work. The known losses to come may be greater than the original estimated profit on the uncompleted work. The conclusions, therefore, regarding uncompleted contracts of the three classes above mentioned are:

1. When the greater portion of a contract has been performed, a portion of the profit can be deemed to have been earned for the purpose of book entry and the declaration of dividends, taking into consideration known excessive costs to come on work to be done by contractor's own organization.

2. When the greater portion of a contract is uncompleted, no profit should be considered earned unless the larger part of the cost of the unfinished work is limited by contracts with the subcontractors which include the erection or installation of the material.

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.

Form of Statement

The form of profit and loss statement which sets up net sales and cost of goods sold cannot be used advantageously in preparing profit and loss statements for a contractor's business. The ultimate selling price and the ultimate cost are not recorded on the books at the time fiscal closings are made. They would be matters of book record if no profit were determined on a contract until the final collection had been made

from an owner and all obligations incurred by the contractor finally discharged. But, with the delays attendant upon making final collections, this would involve postponing and postponing the determination of profits on contracts, despite the fact that the contracts had proved profitable and earnings been made. A question might exist as to the amount of the full profit, but there does not seem to be a justification for saying that no profit at all has been earned simply because a portion of the total may be in question. The final payment on a contract is frequently greater than the profit. The retention which has accumulated by the time the work is completed is generally greater than the profit. A profit and loss statement is therefore prepared, using the actual amount determined as the profit or loss on each contract (Form 27).

Form 27. Profit and Loss Statement

The construction profits used in this statement have been taken from the "statement

of uncompleted contracts" for convenience.

General Overhead Expense

The general overhead expense has been set up as a direct charge against the profits collectively. It is impossible to formulate a rule that will be uniformly applicable in all contractors' offices for the distribution of general overhead expense to construction contracts. The difficulties will be pointed out and references made to the conditions under which overhead can be distributed.

To attempt to base the distribution on the volume of business may result in penalizing some contracts. A contractor might have some construction work involving a million dollars and another contract representing $200,000. Both operations might require six months to complete and be conducted simultaneously. The larger operation would not have five times as many payrolls, invoices, and other details for the office force to handle, nor would it entail five times as much general overhead expense of any kind. The larger contract would, however, be charged with a proportion of general overhead expense five times as great as the smaller one, if the distribution were based on the volume of business. The first condition, therefore, is that all the jobs must be uniform in volume in order to distribute overhead on volume of business.

A distribution of general overhead expense proportioned according to profits accruing would penalize the profitable operation as compared with the unprofitable one. What portion of the burden would be chargeable against a job that resulted in a net loss to the contractor as compared with one which yielded a 15% profit? Yet the former may have received more attention in attempts to make the job profitable. The second condition is that when the rate of profit is uniformly the same on all work, it is proper to distribute overhead expenses based on profits earned.

Another theory might be to distribute the burden of overhead expenses in proportion to the cost of work performed.

The same objection applies to this method as stated above for volume of business.

It would be difficult to make an apportionment based on number of units of work produced, when there are so many different units of work performed. What is the relative value of excavating a cubic yard of earth as compared with applying a square yard of plaster?

The element of time required to construct an operation is not a fair measure of distributing overhead. A job costing $100,000 might take as long to complete as one involving a million dollars, through delays in the preparation of plans, specifications, etc. The larger operation might be a rush job and cause a greater part of the overhead expense than the smaller one.

It follows, therefore, that a contractor's method of conducting operations must result in some of the chief factors being uniform on all contracts before an equitable distribution of the burden of general overhead expense can be effected. These factors are uniformity of size of contracts, of rate of profit earned, and of time required to execute and complete a contract.

Normal Burden

When operating conditions in a particular contractor's office are such as to make the distribution of burden feasible, a normal burden must be established.

The contractor does not sell merchandise, but the skill and services of the men in his permanent organization. He must, therefore, retain a certain skeleton organization, regardless of the amount of work he has on hand. He can release clerks, office boys, etc., but he cannot discharge the higher-salaried men without running the risk of being unable to secure competent men at the time his work increases, or, if he should secure them, of being able to have his organization function properly. This