Lamb Ltd is constructing a new college building for a local authority. The contact begins in 2014 and the price agreed for the college is £6 million. However, the college in unlikely to be completed until 2016 owing to extensive remedial work being necessary, and Lamb Ltd will incur the following costs:
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£1.8 million |
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2015 |
£2.2 million |
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2016 |
£0.8 million |
The profit on the contract is estimated to be £1.2 million. This notional profit can be included as income if we make adjustments for the ongoing progress on the contract. Imagine that, in our example, by 2015 the value of the work certified had been £4 million and the cost of the work certified so far was £3.8 million. If the amount Lamb Ltd has received so far for work certified total £3.6 million, attributable profit would be calculated as follows:
Notional profit x (2/3) x (Cash received on account x value of work certified)
£200,000 x (2/3) x (£3 600 000/£4,000,000) = £120,000
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