NOTE 10 – COMMITMENTS

Leases

The Company determines if a contract is or contains a lease at inception or upon modification of the contract. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The Company has made the election, as permitted by the new standard, not to apply the new accounting to those leases with terms of twelve (12) months or less and that do not include options to purchase the underlying assets that the Company is reasonably certain to exercise. Finally, the Company elected to utilize the package of permitted practical expedients that allowed entities to not reassess whether any existing contracts were or contained leases.

The Company’s operating leases primarily cover office space that expire on various dates through May 2024; it has no finance leases. Most of the equipment used by the Company in the performance of its construction services contracts is rented, with periods of expected usage less than one year, or owned. Certain leases contain renewal options, which are included in expected lease terms if they are reasonably certain of being exercised by the Company.

Other equipment leases are embedded in broader agreements with subcontractors or construction equipment suppliers. None of the operating leases include significant amounts for incentives, rent holidays or price escalations. Under certain lease agreements, the Company is obligated to pay property taxes, insurance, and maintenance costs.

Operating lease right-of-use assets and associated lease liabilities are recognized in the balance sheet at the lease commencement date based on the present value of future minimum lease payments to be made over the expected lease term. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate (LIBOR plus 2)% at the commencement date in determining the present value of future payments. The expected lease term includes an option to extend or to terminate the lease when it is reasonably certain the Company will exercise such option. The aggregate amount of new right-of-use assets and the related lease liabilities added to the Company’s consolidated balance sheet during Fiscal 2020 was approximately $2.0 million.

Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. Operating lease expense for Fiscal 2020 and operating lease payments made during Fiscal 2020 were both approximately $1.0 million. For operating leases as of January 31, 2020, the weighted average lease term was 33 months and the weighted average discount rate was 4.1%.The following is a schedule of future minimum lease payments for the operating leases that were recognized in the consolidated balance sheet as of January 31, 2020:


Years ending January 31,
2021	$	1,239
2022		639
2023		246
2024		179
2025		25
Total lease payments		2,328
Less interest portion		118
Present value of lease payments		2,210
Less current portion (included in accrued expenses)		1,574
Non-current portion	$	636

The future minimum lease payments presented above include amounts due under a long-term lease covering the primary offices and plant for TRC with the founder and current chief executive officer of TRC at an annual rate of $0.3 million through April 30, 2021, as well as amounts due under a long-term lease covering the primary offices for APC with several of its current and former executives at an annual rate of less than $0.1 million through December 31, 2023.

The Company also uses equipment and occupies other facilities under short-term rental agreements. Rent expense amounts incurred under operating leases and short-term rental agreements (including portions of the lease expense amount disclosed above) and included in costs of revenues were $4.0 million, $11.4 million and $20.3 million for Fiscal 2020, 2019 and 2018.Rent expense amounts incurred under these types of arrangements (including portions of the lease expense amount disclosed above) and included in selling, general and administrative expenses were approximately $0.7 million for each year.

Performance Bonds and Guarantees

In the normal course of business and for certain major projects, the Company may be required to obtain surety or performance bonding, to provide parent company guarantees, or to cause the issuance of letters of credit (or some combination thereof) in order to provide performance assurances to clients on behalf of its contractor subsidiaries. As these subsidiaries are wholly-owned, any actual liability related to contract performance is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. When sufficient information about performance claims on guaranteed projects would be available and monetary damages or other costs or losses would be determined to be probable, the Company would record such guarantee losses. Any amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress as of January 31, 2020 are not estimable.

Argan has provided a parent company performance guarantee and has caused the Bank to issue certain letters of credit (see Notes 4 and 9) to Técnicas Reunidas (“TR”), the EPC services contractor on the TeesREP project, on behalf of APC, a major subcontractor to TR on this project. As of January 31, 2020, the Company has also provided a financial guarantee on behalf of GPS to an original equipment manufacturer in the amount of $3.6 million in support of business developmental efforts which did result in the award of an EPC services contract to GPS for the construction of a gas-fired plant project.

Warranties

The Company generally provides assurance-type warranties for work performed under its construction contracts which do not represent separate performance obligations. The warranties cover defects in equipment, materials, design or workmanship, and most warranty periods typically run from nine to twenty-four months after the completion of construction on a particular project. Because of the nature of the Company’s projects, including project owner inspections of the work both during construction and prior to substantial completion, the Company has not experienced material unexpected warranty costs in the past. Warranty costs are estimated based on experience with the type of work and any known risks relative to each completed project. The accruals of liabilities, which are established to cover estimated future warranty costs, are recorded as the contracted work is performed, and they are included in the amounts of accrued expenses in the consolidated balances sheets. The liability amounts may be periodically adjusted to reflect changes in the estimated size and number of expected warranty claims.

Self-Insurance

TRC uses a self-insurance program for exposures related to worker’s compensation and certain employee health insurance claims. Liabilities in excess of contractually limited amounts are the responsibility of an insurance carrier. Beginning in calendar year 2017, the employee health benefits for the employees of TRC, which were previously self-insured, are fully insured.

To the extent that the Company retains the risks for these exposures, including claims incurred but not reported, and for any loss amounts related to the deductibility clauses included in its other insurance policies, liabilities have been accrued based upon the Company’s best estimates, with input from legal and insurance advisors. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the near-term. Management believes that reasonably possible losses, if any, for these matters, to the extent not otherwise disclosed and net of recorded accruals, will not have a material adverse effect on the Company’s future results of operations, financial position or cash flow. At January 31, 2020 and 2019, the aggregate amounts established to cover retained losses and remaining self-insured claims were included in the balances of accrued expenses in the corresponding consolidated balance sheets.