2. Accounts Receivable – Net and Revenue Recognition

Net accounts receivable and billings in excess of costs on uncompleted contracts consisted of the following:

	March 30, 2014		September 29, 2013
	(in thousands)

Billed	$	338,377	$	375,149
Unbilled	339,638		306,969
Contract retentions	23,469		23,353
Total accounts receivable – gross	701,484		705,471

Allowance for doubtful accounts	(45,003)		(44,624)
Total accounts receivable – net	$	656,481	$	660,847

Billings in excess of costs on uncompleted contracts	$	85,970	$	79,507

Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Most of our unbilled receivables at March 30, 2014 are expected to be billed and collected within 12 months. Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years. The allowance for doubtful accounts represents amounts that may become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management’s consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and particular industry conditions that may affect a client’s ability to pay. Billings in excess of costs on uncompleted contracts represent the amount of cash collected from clients and billings to clients on contracts in advance of revenue recognized. The majority of billings in excess of costs on uncompleted contracts will be earned within 12 months.

Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance. Such changes result in “change orders” and may be initiated by us or by our clients. In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing; however, sometimes circumstances require that work progresses without obtaining a definitive client agreement. Unapproved change orders constitute claims in excess of agreed contract prices that we seek to collect from our clients (or other third parties) for delays, errors in specifications and designs, contract terminations, or other causes of unanticipated additional costs. Revenue on claims is recognized when contract costs related to claims have been incurred and when their addition to contract value can be reliably estimated. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period such as when client agreement is obtained or a claims resolution occurs.

Total accounts receivable at March 30, 2014 and September 29, 2013 include approximately $61 million and $41 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination, primarily with U.S. federal government agencies. The increase from the end of fiscal 2013 primarily relates to the impact of cost overruns on an oil and gas project in Western Canada during the second quarter of fiscal 2014, primarily due to changes in scope that are currently in negotiation with the client. As a result, we revised our estimate of the total costs to complete the project and recorded a charge of $5.3 million in the second quarter of fiscal 2014 to reverse profit recognized in prior periods. As of March 30, 2014, this project was approximately 90% complete, with remaining estimated costs to complete of approximately $13 million. In addition, during the second quarter of fiscal 2014, we recorded accounts receivable and revenue of approximately $10 million for this project based upon the portion of change orders that we believe have a technical and legal basis for recovery and are probable of collection. If the actual costs to complete the project exceed our estimates, or we are unable to fully collect the accounts receivable, we could incur further losses. However, we intend to pursue all options to collect the entire amount of the change orders, which is expected to exceed the revenue recognized on the project. If we are successful, we could recognize gains on recovery in future periods in our RCM segment. In addition to new claims, we also regularly evaluate all claim amounts recorded as of the beginning of each period, and record appropriate adjustments to operating earnings when it is probable that the claim will result in a different contract value than the amount previously reliably estimated. As a result of this assessment, we recognized revenue and an increase to operating income of $3.4 million and $1.1 million for the six months ended March 30, 2014 and March 31, 2013, respectively.

Billed accounts receivable related to U.S. federal government contracts were $68.9 million and $50.5 million at March 30, 2014 and September 29, 2013, respectively. U.S. federal government unbilled receivables, net of progress payments, were $69.9 million and $79.3 million at March 30, 2014 and September 29, 2013, respectively. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at March 30, 2014 and September 29, 2013.

We recognize revenue for most of our contracts using the percentage-of-completion method, primarily utilizing the cost-to-cost approach to estimate the progress towards completion in order to determine the amount of revenue and profit to recognize. Revenue and cost estimates for each significant contract are reviewed and reassessed quarterly. Changes in those estimates could result in recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. As a result, we recognized the net unfavorable operating income adjustment of $5.3 million previously described for the three and six months ended March 30, 2014. No material operating income adjustments were recognized during the three and six months ended March 31, 2013. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings. As of March 30, 2014 and September 29, 2013, we recorded a liability for anticipated losses of $9.2 million and $13.3 million, respectively. The estimated cost to complete the related contracts as of March 30, 2014 was $41.1 million. Loss contracts had an immaterial impact on our consolidated results for the three and six months ended March 30, 2014 and March 31, 2013.