Firm Fixed-Price (FFP) Contract — Cost-to-Cost Percentage of Completion Revenue
Recording revenue on a firm fixed-price defense contract using the cost-to-cost percentage of completion method — bearing full cost risk while recognizing revenue as work progresses.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Contract Asset — Costs in Excess of Billings (FFP — Revenue Earned > Billed) | Asset (+) | 42,500,000.00 | - |
| Revenue — FFP Contract (Cost-to-Cost POC) | Revenue (+) | - | 75,000,000.00 |
| Costs of Revenue — Contract Costs Incurred | Expense (+) | 65,000,000.00 | - |
| Progress Payments Received (Offset Against Contract Asset) | Asset (-) | - | 32,500,000.00 |
💡 Accountant's Note
Firm Fixed-Price is the government's preferred contract type — the contractor bears ALL cost risk (overruns come out of profit; underruns become profit). For a $500M FFP contract to deliver 10 F-35 aircraft components, with estimated total cost of $425M (target profit margin: 15%): After Year 2, $65M of costs have been incurred out of $425M estimated. Revenue recognized: ($65M / $425M) × $500M = $76.5M. Cost of revenue: $65M incurred. Gross profit: $11.5M (the proportional margin recognition). The cost-to-cost method for FFP contracts under ASC 606 is appropriate when the performance obligation is satisfied over time and output cannot be directly observed (you can't count '35.3% of an aircraft'). Progress payments from the DoD (typically 75% of incurred costs on large FFP contracts) offset the contract asset but are NOT recorded as revenue — they are a financing mechanism, not a measure of performance.
Practitioner & Systems Framework
💻 ERP Architecture
FFP contracts require the most rigorous cost control systems — every dollar of overrun directly reduces profit. Earned Value Management Systems (EVMS) — required on contracts >$20M ($50M for certain contract types per DFARS) — provide real-time visibility into cost performance (CPI — Cost Performance Index) and schedule performance (SPI — Schedule Performance Index). A CPI below 1.0 indicates the contract is over-running. The EAC is continuously updated: if actual costs in Year 2 are running 12% over plan, the EAC is revised upward, potentially triggering a loss contract recognition if the EAC exceeds the contract price.
⚠️ Audit Flags
FFP contract audits focus on EAC accuracy — the estimate of total cost to complete drives the revenue recognition rate and the margin. Auditors compare the EAC to: (1) actual cost performance to date (is the current run rate sustainable?), (2) prior period EAC (has the estimate changed materially? why?), (3) risk register (are all known risks adequately reflected in the EAC?). The asymmetry: under-estimating costs inflates current-period revenue and profit; over-estimating creates margin that is released in future periods. DCAA does not typically audit FFP contracts (the contractor bears cost risk, so DCAA has limited jurisdiction), but financial statement auditors thoroughly test EAC assumptions.
📄 Required Documentation
Contract and all modifications, EAC by CLIN and total contract, Earned Value Management cost performance reports (CPR Format 1-5), basis of estimate documentation for EAC cost elements, risk register and contingency analysis, progress billing schedule, cumulative catch-up adjustment calculation (when EAC changes), and loss contract assessment.
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