Contract Combination
To determine the proper revenue recognition method for contracts, the Company evaluates
whether two or more contracts should be combined and accounted for as one single contract
and whether the combined or single contract should be accounted for as more than one
performance obligation. This evaluation requires significant judgment and the decision to
combine a group of contracts or separate a combined or single contract into multiple
performance obligations could change the amount of revenue and profit recorded in a given
period. Contracts are considered to have a single performance obligation if the promise to
transfer the individual goods or services is not separately identifiable from other promises in
the contracts, which is mainly because the Company provides a significant service of
integrating a complex set of tasks and components into a single project or capability.
For contracts with multiple performance obligations, the Company allocates the transaction
price to each performance obligation using management’s best estimate of the standalone
selling price of each distinct good or service in the contract. In cases where the Company does
not provide the distinct good or service on a standalone basis, the primary method used to
estimate standalone selling price is the expected cost plus a margin approach, under which
management forecasts the Company’s expected costs of satisfying a performance obligation
and then adds an appropriate margin for that distinct good or service,
Performance Obligations
For performance obligations related to operations, planned maintenance, and water testing
and billing services, control transfers to the customer over time as the services are provided.
These services are sold primarily to municipalities or small, privately owned community water
systems. The majority of the Company’s unplanned maintenance contracts are billed on a
time and materials basis and revenue is recognized over time as the services are performed.
The majority of the Company's operations, planned maintenance, and water testing and
billing contracts are billed on a fixed price basis. For fixed price contracts, the Company
measures its progress towards complete satisfaction of the performance obligation using a
time-based measure. This method is used because management considers time elapsed to
be the best available measure of progress on contracts.
Contract Estimates and Modifications
Due to the nature of the work required to be performed on many of the Company’s
performance obligations, the estimation of total revenue and cost at completion is complex,
subject to many variables and requires significant judgment.
104
