What method does Chem Dry use to measure progress on 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, the company uses the input method to measure progress on mitigation and construction contracts. These contracts involve both residential customers and insurance companies, with Chem Dry typically having one performance obligation per contract.
The input method recognizes revenue based on Chem Dry's efforts to satisfy the performance obligation. The most common input method Chem Dry uses is contract cost to date, including labor and direct costs, relative to the total contract cost expected to be expended. This means that as Chem Dry incurs costs for labor and materials, it recognizes a portion of the revenue from the contract.
Chem Dry bills these contracts on a time and materials basis, using a practical expedient to recognize revenue as they have the right to invoice those amounts. Project change orders, which arise from unexpected costs or scope extensions, are treated as modifications to the contract price using the cumulative catch-up adjustment method, and they rarely create a separate project performance obligation.
This approach provides Chem Dry with a systematic way to recognize revenue as work progresses, aligning revenue recognition with the actual effort and costs incurred on each project. For a franchisee, this means understanding how costs are tracked and how they translate into recognized revenue, especially when dealing with mitigation and construction projects.