By: Andrew Eiler, CPA
The Indiana Department of Transportation (INDOT) introduced a new online system for construction contractors to complete their Contractor Prequalification application. Two common questions have been encountered when using the new INDOT Technical Applications Pathway (ITAP); presentation of contract assets and retainage receivable, and aggregate bidding capacity listed on the qualification certificate.
Presentation of Contract Assets and Retainage Receivable
The contractor prequalification form nomenclature and presentation has not been updated consistent with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, as it relates to the treatment of retainage receivables.
Under current accounting guidance, retainage receivables are considered a component of contract assets. In the ITAP application, retainage is required to be included in line 5 “Accounts Receivable from Incomplete Construction Contracts”. This creates differences between the ITAP Contractor’s Statement of Financial Condition and the audited or reviewed financial statements that if not presented properly could result in an inadvertent reduction in your company’s calculated capacity rating.
If both are current assets, how does this impact the capacity rating?
The common mistake would be to exclude retention receivable from line 5 on the Contractor’s Statement of Financial Condition and let it reside in line 7, Costs and Estimate Earnings in Excess of Billings on Incomplete Contracts. Where the negative impact to capacity rating resides is if the net of line 7, Costs and Estimate Earnings in Excess of Billings on Incomplete Contracts LESS line 20, Billings on Incomplete Contracts in Excess of Costs and Estimated Earnings, is greater than $1,000,000. These net underbillings greater than $1,000,000 are a reduction to the working capital component of the capacity rating. Additionally, working capital is a 10X factor in the capacity calculation (a $100,000 error could reduce capacity by $1,000,000).
We also recommend the audited or reviewed financial statements clearly demonstrate the components of contract assets in order to reconcile back to the Contractor’s Statement of Financial Condition in ITAP.
Aggregate Bidding Capacity Listed on the Qualification Certificate
The ITAP system no longer includes the qualification capacity rating of “unlimited” for a contractor’s aggregate bidding capacity or class of work ratings. Any class of work a contractor may have qualified as “unlimited” in prior years, will now be presented as $99,999,999. This change will also impact the aggregate bidding capacity for contractors as there is assigned limits on the underlying classes of work. However, per the INDOT Prequalification Rules and Statutes, if a contractor’s maximum aggregate rating exceeds $100,000,000, the contractor will still be considered to have an unlimited bidding capacity rating.
As a firm specializing in construction, Blue & Co. understands the importance of your company’s capacity rating and wants to make sure your company is not negatively impacted by inadvertent errors in presentation. Blue will continue to provide planning tips to avoid other common deductions on INDOT prequalification applications.
If you have any questions related to the new prequalification application form as you prepare for the upcoming INDOT lettings, please reach out to your local Blue & Co. advisor or the author:
Andrew Eiler, CPA
Manager
aeiler@blueandco.com
317-428-6852
