Lockheed Martin 2011 Annual Report Download - page 51

Beginning January 1, 2011, we evaluate new or significantly modified contracts with customers other than the U.S.
Government, to the extent the contracts include multiple elements, to determine if the individual deliverables should be
accounted for as separate units of accounting. When we determine that accounting for the deliverables as separate units is
appropriate, we allocate the contract value to the deliverables based on their relative estimated selling prices. The contracts or
contract modifications we evaluate for multiple elements typically are long term in nature and include the provision of both
DD&P activities and services. Based on the nature of our business, we generally account for components of such contracts
using the POC accounting model or the services accounting model, as appropriate. This change in accounting has not had a
material effect on our financial results, and is not expected to have a material effect in future periods.
We classify net sales as products or services on our Statements of Earnings based on the predominant attributes of the
underlying contract. Most of our long-term contracts are denominated in U.S. dollars, including contracts for sales of military
products and services to foreign governments conducted through the U.S. Government. We record sales for both DD&P
activities and services under cost-reimbursable, fixed-price, and time-and-materials contracts.
Contract Types
Cost-reimbursable contracts
Cost-reimbursable contracts, which accounted for about 50% of our total net sales in 2011, provide for the payment of
allowable costs incurred during performance of the contract plus a fee, up to a ceiling based on the amount that has been
funded. We generate revenue under two general types of cost-reimbursable contracts: cost-plus-award-fee/incentive fee
(which represent a substantial majority of our cost-reimbursable contracts) and cost-plus-fixed-fee contracts.
Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s
assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical, and
schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee which is adjusted by a
formula based on the relationship of total allowable costs to total target costs (incentive based on cost) or reimbursement of
costs plus an incentive to exceed stated performance targets (incentive based on performance). The fixed fee in a cost-plus-
fixed-fee contract is negotiated at the inception of the contract and that fixed fee does not vary with actual costs.
Fixed-price and other contracts
Under fixed-price contracts, which accounted for about 45% of our total net sales in 2011, we agree to perform the
specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was
negotiated, we will generate more or less profit, or could incur a loss. Some fixed-price contracts have a performance-based
component under which we may earn incentive payments or incur financial penalties based on our performance.
Under time-and-materials contracts, which accounted for about 5% of our total net sales in 2011, we are paid a fixed
hourly rate for each direct labor hour expended, and we are reimbursed for allowable material costs and allowable
out-of-pocket expenses. To the extent our actual direct labor and associated costs vary in relation to the fixed hourly billing
rates provided in the contract, we will generate more or less profit, or could incur a loss.
POC Method of Accounting
We record net sales and an estimated profit on a POC basis for cost-reimbursable and fixed-price contracts for DD&P
activities, and services contracts with the U.S. Government.
The POC method for DD&P contracts depends on the nature of the products provided under the contract. For example,
for contracts that require us to perform a significant level of development effort in comparison to the total value of the
contract and/or to deliver minimal quantities, sales are recorded using the cost-to-cost method to measure progress toward
completion. Under the cost-to-cost method of accounting, we recognize sales and an estimated profit as costs are incurred
based on the proportion that the incurred costs bear to total estimated costs. For contracts that require us to provide a
substantial number of similar items without a significant level of development, we record sales and an estimated profit on a
POC basis using units-of-delivery as the basis to measure progress toward completing the contract. For contracts to provide
services to the U.S. Government, sales are generally recorded using the cost-to-cost method.
Award fees and incentives, as well as penalties related to contract performance, are considered in estimating sales and
profit rates on contracts accounted for under the POC method. Estimates of award fees are based on past experience and
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