Boeing 2011 Annual Report Download - page 22

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We enter into cost-type contracts which also carry risks.
Our BDS business generated approximately 40% of its 2011 revenues from cost-type contracting
arrangements. Some of these are development programs that have complex design and technical
challenges. These cost-type programs typically have award or incentive fees that are subject to
uncertainty and may be earned over extended periods. In these cases the associated financial risks
are primarily in reduced fees, lower profit rates or program cancellation if cost, schedule or technical
performance issues arise. Programs whose contracts are primarily cost-type include GMD, BCTM,
P-8A Poseidon, Proprietary programs, JTRS, FAB-T and the EA-18G Growler Airborne Attack
Electronic Aircraft.
We enter into contracts that include in-orbit incentive payments that subject us to risks.
Contracts in the commercial satellite industry and certain government satellite contracts include in-orbit
incentive payments. These in-orbit payments may be paid over time after final satellite acceptance or
paid in full prior to final satellite acceptance. In both cases, the in-orbit incentive payment is at risk if the
satellite does not perform to specifications for up to 15 years after acceptance. The net present value
of in-orbit incentive fees we ultimately expect to realize is recognized as revenue in the construction
period. If the satellite fails to meet contractual performance criteria, customers will not be obligated to
continue making in-orbit payments and/or we may be required to provide refunds to the customer and
incur significant charges.
Our ability to deliver products and services that satisfy customer requirements is heavily
dependent on the performance of our subcontractors and suppliers, as well as on the
availability of raw materials and other components.
We rely on other companies including subcontractors and suppliers to provide and produce raw
materials, integrated components and sub-assemblies, and production commodities and to perform
some of the services that we provide to our customers. If one or more of our suppliers or
subcontractors experiences delivery delays or other performance problems, we may be unable to meet
commitments to our customers. In addition, if one or more of the raw materials on which we depend
(such as aluminum, titanium or composites) becomes unavailable or is available only at very high
prices, we may be unable to deliver one or more of our products in a timely fashion or at budgeted
costs. In some instances, we depend upon a single source of supply. Any service disruption from one
of these suppliers, either due to circumstances beyond the supplier’s control or as a result of
performance problems or financial difficulties, could have a material adverse effect on our ability to
meet commitments to our customers or increase our operating costs.
We use estimates in accounting for many contracts and programs. Changes in our estimates
could adversely affect our future financial results.
Contract and program accounting require judgment relative to assessing risks, estimating revenues
and costs and making assumptions for schedule and technical issues. Due to the size and nature of
many of our contracts and programs, the estimation of total revenues and cost at completion is
complicated and subject to many variables. Assumptions have to be made regarding the length of time
to complete the contract or program because costs also include expected increases in wages and
employee benefits, material prices and allocated fixed costs. Incentives or penalties related to
performance on contracts are considered in estimating sales and profit rates, and are recorded when
there is sufficient information for us to assess anticipated performance. Suppliers’ assertions are also
assessed and considered in estimating costs and profit rates. Estimates of award fees are also used in
sales and profit rates based on actual and anticipated awards.
With respect to each of our commercial aircraft programs, inventoriable production costs (including
overhead), program tooling and other non-recurring costs and routine warranty costs are accumulated
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