FLE122 Annual Report 2018

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13. Construction contracts Earnings on construction contracts (including sub-contracts) are determined using the percentage-of-completion method and represent the value of work carried out during the year, including amounts not invoiced. Costs are recognised as incurred and revenue is recognised on the basis of the proportion of total costs at the reporting date to the estimated total costs of the contract. Estimates of the final outcome of each contract may include cost contingencies to take account of specific risks within each contract that have been identified. The cost contingencies are reviewed on a regular basis throughout the contract life and are adjusted where appropriate. However, the nature of the risks on contracts are such that they often cannot be resolved until the end of the project. Margin on the contract is not recognised until the outcome of the contract can be reliably estimated. The Group uses its professional judgement to assess both the physical completion and the forecast financial result of the contract. When a contract is identified as loss- making, a provision is made for estimated future losses on the entire contract. Revenue in respect of variations to contracts and incentive payments is recognised when it is probable it will be agreed by the customer. Revenue in respect of claims is recognised when negotiations have reached an advanced stage such that it is probable that the customer will accept the claim and the probable amount can be measured reliably. Profit for the year may include the benefit of claims settled in the year on contracts completed in previous years. Construction work in progress is stated at cost plus profit recognised to date, less progress billings and any provision for future foreseeable losses. Cost includes all expenditure directly related to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity.

Estimates and judgements are made relating to a number of factors when assessing construction contracts. These primarily include the programme of work throughout the contract period, assessment of future costs after considering changes in the scope of work, maintenance

and defect liabilities, expected inflation (for unlet sub-trades) and performance bonuses or penalties. The significant judgements inherent in accounting for the Group’s most material construction projects are:

• The extent to which a project progresses in line with the complex project programme and timetable previously formed and the resulting impact of any programme delays or gains on project costs, especially project overheads (preliminary and general costs) and any liquidated or other damages; • Sub-contractor cost, in particular cost that is yet to be agreed in scope or price (including inflationary pressures) or that relating to programme prolongation; • Future weather and ground conditions. Estimates made are inherently more uncertain earlier in the project’s life and on larger, more complex projects. A summary of the Group’s major construction projects and their approximate stage of completion is shown below.

June 2018 NZ$M

June 2017 NZ$M

Fletcher Building Group

5,878

Gross construction work in progress plus margin/less provisions for losses

5,877

(6,504)

Progress billings

(6,091)

(626)

(214)

38

Construction contracts with cost and margin in advance of billings Construction contracts with billings in advance of cost and margin Provision for future net cash outflows on loss-making contracts

62

(184) (480) (626)

(114) (162)

Carrying amount at the end of the year (214) The provision for future net cash outflows on loss-making contracts at 30 June 2018 is expected to be realised in cash outflows of $343 million in the year ending 30 June 2019, and $137 million thereafter. Included in sales is $1,605 million of contract revenue (June 2017: $2,081 million).

73 Fletcher Building Limited Annual Report 2018

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