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Thompson Construction - Construction Accounting

THOMPSON CONSTRUCTION
Thompson Construction has a contract to remodel two Government warehouses for use as modern office space. The $900,000 contract was on March 1, with completion scheduled for 240 days after contract award. For 150 days, work proceeded as expected. Thompson completed work on Warehouse 1 and began work on Warehouse 2.

In removing the existing cracked and damaged Warehouse 2 floor, Thompson personnel uncovered what appeared to be ancient pottery. Thompson's Program Manager notified you and you ordered the contractor to suspend work until the Government could determine the source and nature of the pottery. University specialists were called in and began a careful excavation of the immediate area. Hundreds of pieces of pottery were removed and sent to nationally recognized experts for analysis. After several weeks, the experts determined that the scrap pottery has no historic value. When the warehouse was built there was a pottery factory about five miles away, and scrap from the factory had been used for fill during the original warehouse construction.

Thirty days after work was suspended, you notified Thompson that work could continue. Because of the delay, completion is now scheduled for 270 days after contract award.

As a result of the delay, Thompson submitted a request for equitable adjustment that includes $21,500 for indirect costs. Thompson calculated that this contract was 50 percent of company billings in July. In August, billings under the contract dropped to zero because of the stop work order. Half of the estimated $43,000 fixed indirect cost for August is $21,500.

Thompson also submitted the following information related to the request for equitable adjustment:
? Billings to the delayed contract from March thru August: $ 580,000

? Billings to all contracts from March thru August: $2,145,000

? Fixed indirect cost incurred from March thru August: $ 258,000

? Projected total billings to the delayed contract (including direct $930,000 costs related to the delay):

? Projected billings to all contracts during the term of the delayed $3,100,000 contract (including the period of the 30-day delay):

? Projected fixed indirect cost for during the term of the delayed $391,500 contract (including the period of the 30-day delay):

1. Using the Eichleay Formula, develop a position on the proposed equitable adjustment.

2. What would your position be if Thompson replaced 30 percent of the work?

Solution Summary

The solution using the Eichleay Formula, develop a position on the proposed equitable adjustment.

$2.19