Handling Claims & Disputes Under the PCM

Despite efforts to ensure communication is clear and contracts are effectively worded, contractors often face the possibility of disputes and claims. As a result, CFMs must be familiar with proper accounting for these issues. This article examines how disputes and claims are handled for tax purposes under the percentage-of-completion method (PCM). Contingent Compensation Generally, the Internal Revenue Code (IRC) and Treasury Regulations require contractors to report contingent compensation from disputes and claims as early as possible. A contractor that is involved in a dispute or claim must include the potential revenue when it is reasonably assured of receiving the contingent amount.1 Moreover, the regulations covering contingent compensation for long-term contracts reflect as fundamental criteria for being reasonably able to predict that the contingent income will be earned when it is reported for financial statement purposes under GAAP. IRC §460(b)(1) requires a contractor that uses the PCM to include all income not previously reported under the contract during the first taxable… read more →