The ASC 606 transition for construction contractors: Identifying the performance obligations – Promises in contracts with customers
Authored by Tom Sheahan
A contract with a customer can be written or oral as long as it has commercial substance. In most circumstances, a contract with a customer explicitly states the goods or services that the construction contractor promises to transfer to a customer. However, the promised goods or services identified in a contract with a customer may not be limited to the goods or services that are explicitly stated in that contract. A contract with a customer may also include promises that are implied by a construction contractor’s customary business practices, published policies or specific statements made when entering into the contract.
A scenario in construction
A contractor enters into a contract with a customer to build a commercial office building. The contractor manages and supervises the construction project, self-performs certain trades and utilizes subcontractors to perform other trade services. The contract includes a one-year warranty covering defects in workmanship. Certain building components are covered by a two-year warranty with the product manufacturer. Though not explicitly stated in the contract, it is a customary business practice for the contractor to perform three-month, six-month, 12-month, 18-month and 24-month walkthroughs with the project owner to identify defects in workmanship and building components. In addition, the contractor will assist the project owner in submitting claims of defect with the subcontractors or filing building component warranty claims.
Conclusion
The contractor evaluates the contract terms and determines that there are multiple goods or services that are capable of being distinct, including the self-performed and subcontracted trade work, the project management and supervision services, the one-year warranty, and the follow-up walkthroughs. The contractor concludes that the self-performed and subcontracted trade work, the project management services, and the supervision services should be combined into one performance obligation because the contractor provides significant services of integrating those items to construct the commercial office building. The contractor would conclude that the one-year warranty, the walkthroughs and the assistance in submitting claims of defect would be separate performance obligations since the customer can benefit from these services separately and they are not highly integrated with the construction of the commercial office building.
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