2.Accounts Receivable – Net and Revenue Recognition

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

	June 28, 2015		September 28, 2014
	(in thousands)

Billed	$	317,697	$	351,693
Unbilled	318,431		363,050
Contract retentions	29,740		26,929

Total accounts receivable – gross	665,868		741,672

Allowance for doubtful accounts	(32,324)		(39,780)

Total accounts receivable – net	$	633,544	$	701,892


Billings in excess of costs on uncompleted contracts	$	92,951	$	103,343

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. Substantially all of our unbilled receivables at June 28, 2015 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, excluding those related to claims, 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 and realization is probable. 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 June 28, 2015 and September 28, 2014 included approximately $53 million and $79 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination. The decline in claims in fiscal 2015 is primarily due to the settlement of two claims related to completed transportation projects in the RCM segment totaling $31 million in the third quarter of fiscal 2015. We settled for cash proceeds of $29 million during the third quarter, and, as a result, recognized reduced revenue and operating income of $2.0 million during the third quarter of fiscal 2015 in the RCM segment. We regularly evaluate all claim amounts 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 estimated. We recorded no other adjustments to revenue or operating income in the third quarter of fiscal 2015 as a result of our updated assessment of the collectability of claims. On a year-to-date basis, we have recorded net losses of $1.8 million related to claims. We recognized revenue and an increase to operating income of $3.4 million during the first nine months of fiscal 2014, all in the second quarter.

Billed accounts receivable related to U.S. federal government contracts were $69.0 million and $57.4 million at June 28, 2015 and September 28, 2014, respectively. U.S. federal government unbilled receivables were $74.0 million and $73.2 million at June 28, 2015 and September 28, 2014, respectively. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at June 28, 2015 and September 28, 2014.

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. 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 net favorable operating income adjustments of $0.1 million during the third quarter of fiscal 2015 and net unfavorable operating income adjustments of $5.8 million during the first nine months of fiscal 2015 compared to unfavorable operating income adjustments of $5.0 million and $10.3 million in the comparable periods of last year. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings. As of June 28, 2015 and September 28, 2014, we maintained a liability for anticipated losses of $11.0 million and $18.6 million, respectively. The estimated cost to complete the related contracts as of June 28, 2015 was $69.7 million.