2.Accounts Receivable – Net

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

	June 26, 2016		September 27, 2015
	(in thousands)

Billed	$	367,632	$	331,364
Unbilled	338,207		311,823
Contract retentions	34,680		24,333

Total accounts receivable – gross	740,519		667,520

Allowance for doubtful accounts	(39,673)		(31,490)

Total accounts receivable – net	$	700,846	$	636,030


Billings in excess of costs on uncompleted contracts	$	93,401	$	93,989

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 June 26, 2016 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 are expected to 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 progress without 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 June 26, 2016 and September 27, 2015 included approximately $43 million and $53 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination. During the first nine months of fiscal 2016 (all in the first quarter), we collected $13.4 million to settle claims of $8.8 million, which resulted in gains in operating income of $4.6 million in the RCM reportable segment. We regularly evaluate all unsettled 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. In the first nine months of fiscal 2016 (all in the first quarter), we also recognized reductions to operating income in our RCM segment and a related increase in the allowance for doubtful accounts of $7.9 million as a result of our updated assessment of the collectability of certain accounts receivable, of which $4.6 million related to unsettled claims. In last year’s third quarter, we settled two claims related to completed transportation projects in the RCM segment totaling $31 million for cash proceeds of $29 million, and, as a result, recognized reduced revenue and operating income of $2.0 million. In the first nine months of fiscal 2015, we recorded net losses of $1.8 million related to claims.

Billed accounts receivable related to U.S. federal government contracts were $50.7 million and $61.9 million at June 26, 2016 and September 27, 2015, respectively. U.S. federal government unbilled receivables were $82.9 million and $74.2 million at June 26, 2016 and September 27, 2015, respectively. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at June 26, 2016 and September 27, 2015.

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 the 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 unfavorable operating income adjustments during both the third quarter and first nine months of fiscal 2016 of $2.3 million (all in the RCM segment) compared to net unfavorable operating income adjustments of $0.1 million and $5.8 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 26, 2016 and September 27, 2015, our balance sheet included a liability for anticipated losses of $5.4 million and $10.5 million, respectively. The estimated cost to complete the related contracts as of June 26, 2016 was $34.6 million.