How does Chem Dry account for project change orders in Mitigation and Construction Contracts?
Chem_Dry Franchise · 2024 FDDAnswer from 2024 FDD Document
- Mitigation and Construction Contracts This includes mitigation and construction projects with both residential customers and insurance companies. Generally, the Company will have one performance obligation per contract. These services are transferred over time using the input method to measure progress. The use of the input method results in the recognition of revenue on the basis of the Company's efforts toward the satisfaction of the performance obligation. The most common input method that the Company uses is contract cost to date, including labor and direct costs relative to the total contract cost expected to be expended in satisfying each performance obligation. Contracts are billed on a time and materials basis using the practical expedient to recognize revenue, as the Company has the right to invoice those amounts. Project change orders are economic factors that affect the nature, amount, timing, and uncertainty of the Company's revenue and cash flows. Change orders often arise when unexpected costs to the existing contract are incurred or the customer wants to extend the scope of the project. These rarely create a separate project performance obligation and are accounted for as a modification to the contract price using the cumulative catch-up adjustment method.
Source: Item 23 — Receipts (FDD pages 68–264)
What This Means (2024 FDD)
According to Chem Dry's 2024 Franchise Disclosure Document, project change orders related to mitigation and construction contracts are considered economic factors that can influence the nature, amount, timing, and uncertainty of the company's revenue and cash flows. These change orders typically arise when unexpected costs are incurred during an existing contract or when a customer wants to expand the project's scope.
Chem Dry treats these change orders as modifications to the contract price. Unless the change orders create a separate project performance obligation, they are accounted for using the cumulative catch-up adjustment method. This means that the contract price is adjusted to reflect the changes, and revenue is recognized accordingly.
For a prospective Chem Dry franchisee, this accounting treatment means that changes in project scope or unexpected costs during mitigation and construction projects will directly impact the recognized revenue. The cumulative catch-up adjustment method ensures that revenue recognition aligns with the actual progress and costs incurred on the project, providing a more accurate reflection of the project's financial performance. Franchisees should be aware of how change orders are documented and approved to ensure proper accounting and revenue recognition.