Lockheed Martin 2013 Annual Report Download - page 55

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 products and services. Based on the
nature of our business, we generally account for components of such contracts using the percentage-of-completion
accounting model or the services accounting model, as appropriate.
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 international governments contracted through the U.S. Government. We record sales for both
products and services under cost-reimbursable, fixed-price, and time-and-materials contracts.
Contract Types
Cost-reimbursable contracts
Cost-reimbursable contracts, which accounted for about 45% of our total net sales in 2013 and 2012 and 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 50% of our total net sales in 2013 and 2012 and 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 2013, 2012, and 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.
Percentage-of-Completion Method of Accounting
We record net sales and an estimated profit on a percentage-of-completion basis for cost-reimbursable and fixed-price
contracts for product and services contracts with the U.S. Government.
The percentage-of-completion method for product 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 percentage-of-completion 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.
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