Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue. A contract’s transaction price is allocated to each distinct performance obligation within that contract and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product life cycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract.

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 77% and 78% of our revenue for the three- and nine-month periods ended September 27, 2020, and 72% and 74% of our revenue for the three- and nine-month periods ended September 29, 2019, respectively. Substantially all of our revenue in the defense segments is recognized over time, because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a point in time accounted for 23% and 22% of our revenue for the three- and nine-month periods ended September 27, 2020, and 28% and 26% of our revenue for the three- and nine-month periods ended September 29, 2019, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On September 27, 2020, we had $81.5 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 45% of our remaining performance obligations as revenue by year-end 2021, an additional 30% by year-end 2023 and the balance thereafter.

Contract Estimates. The majority of our revenue is derived from long-term contracts and programs that can span several years. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on

profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:



	Three Months Ended				Nine Months Ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Aircraft manufacturing and completions	$	1,546	$	1,972	$	4,303	$	5,304
Aircraft services	429		523		1,337		1,567
Total Aerospace	1,975		2,495		5,640		6,871
Military vehicles	1,179		1,137		3,428		3,361
Weapons systems, armament and munitions	496		474		1,444		1,336
Engineering and other services	126		129		391		338
Total Combat Systems	1,801		1,740		5,263		5,035
IT services	2,029		2,071		5,901		6,398
Total Information Technology	2,029		2,071		5,901		6,398
C4ISR solutions	1,221		1,220		3,518		3,655
Total Mission Systems	1,221		1,220		3,518		3,655
Nuclear-powered submarines	1,704		1,567		4,972		4,482
Surface ships	461		402		1,433		1,376
Repair and other services	240		266		717		760
Total Marine Systems	2,405		2,235		7,122		6,618
Total revenue	$	9,431	$	9,761	$	27,444	$	28,577

Revenue by contract type was as follows:



Three Months Ended September 27, 2020	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	1,821	$	1,552	$	806	$	694	$	1,641	$	6,514
Cost-reimbursement	—		231		846		478		763		2,318
Time-and-materials	154		18		377		49		1		599
Total revenue	$	1,975	$	1,801	$	2,029	$	1,221	$	2,405	$	9,431
Three Months Ended September 29, 2019
Fixed-price	$	2,306	$	1,501	$	824	$	719	$	1,517	$	6,867
Cost-reimbursement	—		230		838		458		716		2,242
Time-and-materials	189		9		409		43		2		652
Total revenue	$	2,495	$	1,740	$	2,071	$	1,220	$	2,235	$	9,761



Nine Months Ended September 27, 2020	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	5,148	$	4,524	$	2,317	$	1,976	$	4,926	$	18,891
Cost-reimbursement	—		690		2,539		1,403		2,188		6,820
Time-and-materials	492		49		1,045		139		8		1,733
Total revenue	$	5,640	$	5,263	$	5,901	$	3,518	$	7,122	$	27,444
Nine Months Ended September 29, 2019
Fixed-price	$	6,271	$	4,344	$	2,620	$	2,122	$	4,508	$	19,865
Cost-reimbursement	—		662		2,537		1,405		2,101		6,705
Time-and-materials	600		29		1,241		128		9		2,007
Total revenue	$	6,871	$	5,035	$	6,398	$	3,655	$	6,618	$	28,577

Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour rates vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.

Revenue by customer was as follows:



Three Months Ended September 27, 2020	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
DoD	$	41	$	942	$	882	$	941	$	2,333	$	5,139
Non-DoD	—		3		1,088		112		1		1,204
Foreign Military Sales (FMS)	23		87		3		5		51		169
Total U.S. government	64		1,032		1,973		1,058		2,385		6,512
U.S. commercial	1,123		76		51		13		17		1,280
Non-U.S. government	59		678		5		134		2		878
Non-U.S. commercial	729		15		—		16		1		761
Total revenue	$	1,975	$	1,801	$	2,029	$	1,221	$	2,405	$	9,431
Three Months Ended September 29, 2019
U.S. government:
DoD	$	87	$	931	$	875	$	861	$	2,157	$	4,911
Non-DoD	—		3		1,141		135		—		1,279
FMS	18		58		3		12		43		134
Total U.S. government	105		992		2,019		1,008		2,200		6,324
U.S. commercial	1,365		62		52		33		31		1,543
Non-U.S. government	77		663		—		145		3		888
Non-U.S. commercial	948		23		—		34		1		1,006
Total revenue	$	2,495	$	1,740	$	2,071	$	1,220	$	2,235	$	9,761



Nine Months Ended September 27, 2020	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
DoD	$	254	$	2,760	$	2,556	$	2,599	$	6,882	$	15,051
Non-DoD	—		9		3,196		335		3		3,543
FMS	93		275		11		23		151		553
Total U.S. government	347		3,044		5,763		2,957		7,036		19,147
U.S. commercial	2,935		217		138		73		77		3,440
Non-U.S. government	133		1,959		—		403		7		2,502
Non-U.S. commercial	2,225		43		—		85		2		2,355
Total revenue	$	5,640	$	5,263	$	5,901	$	3,518	$	7,122	$	27,444
Nine Months Ended September 29, 2019
U.S. government:
DoD	$	262	$	2,634	$	2,725	$	2,529	$	6,375	$	14,525
Non-DoD	—		9		3,511		403		1		3,924
FMS	47		227		12		33		134		453
Total U.S. government	309		2,870		6,248		2,965		6,510		18,902
U.S. commercial	3,820		171		137		107		97		4,332
Non-U.S. government	284		1,951		13		492		7		2,747
Non-U.S. commercial	2,458		43		—		91		4		2,596
Total revenue	$	6,871	$	5,035	$	6,398	$	3,655	$	6,618	$	28,577

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense segments, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace segment, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the nine-month period ended September 27, 2020, were not materially impacted by any other factors.

Revenue recognized for the three- and nine-month periods ended September 27, 2020, and September 29, 2019, that was included in the contract liability balance at the beginning of each year was $767 and $3.2 billion, and $1.1 billion and $4 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.