How are Chem Dry's mitigation and construction contracts billed?
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, mitigation and construction contracts, which involve projects with residential customers and insurance companies, are typically billed on a time and materials basis. Chem Dry uses this method as a practical way to recognize revenue, as it retains the right to invoice for the amounts related to the time and materials expended.
Chem Dry recognizes revenue over time as the services are performed, using the input method to measure progress. This approach considers the company's efforts in fulfilling the performance obligation. The most common input method involves assessing contract costs to date, including labor and direct costs, relative to the total expected contract cost.
Project change orders, which can arise from unexpected costs or changes in the project scope, are treated as modifications to the contract price. These changes are accounted for using the cumulative catch-up adjustment method, and they rarely create separate performance obligations. This means that any adjustments to the contract value are recognized in the period the change is approved, ensuring that revenue recognition accurately reflects the updated project parameters.