Percentage of Completion Method

Sorry, dumb question.

With regards to construction companies using the Percentage of Completion Method - does the customer rather than the contractor generally pay for all the costs under ‘‘Contracts in Progress’’ (which is made up of : Cost and Estimated Earnings in Excess of Billings and Billings in Excess of Costs and Estimated Earnings) by the time the contract has finished?

And when the contractor pays for the costs under Cost and Estimated Earnings in Excess of Billings, it’s like an IOU from the customer to the contractor and eventually the customer pays for all these costs??

So by the end of the contract the customer will have paid for all these costs, and any negative or positive swings in the contractors working capital position in the free cash flow statement during the contract are just temporary - and as such if you were to do a DCF valuation of the contractor company, those swings in working capital should not be deducted from the free cash flow imputs as in essence they are not underlying costs as by the end of the contract they would have all been paid by the customer?

Thanks for any help

If you have a steady state with a stable order intake/ revenue growth and stable prepayment inflows there should not be any swings in the working capital as from an overall perspective the cash-in- and -outflows from the construction work should be in an steady state as well.

Costs in Excess of Billings, Billings in Excess of Costs as well as Prepayments should all grow at a contant rate without causing any swings in the operating cash flow.

Best, Oscar