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Contracts in progress

PostPosted: Mon Mar 16, 2015 7:31 am
by mrbean
With regards to construction companies using the ''Percentage of Completion method'' and ''change in contracts in progress'' on the cash flow statement - is it the customer rather than the contractor who ultimately pays for the costs in CIP by the time the project is completed?
And any swings in ''change in contracts in progress'' are just temporary?? ie, if the contractor ends up paying more than the customer for these costs in a certain period of the contract, then an entry under assets will be made, similar to accounts receivables, which is like an IOU to the contractor from the customer. But if the customer mostly pays during a year, then the liability account increases, increasing free cash flow. But by the completion of the contract the customer pays for all of these costs?

(I'm looking at this from a valuation DCF perspective, but need to understand the ''change in contracts in progress'' to try and determine what a companies underlying free cash flow is)

Thanks for any help.