Revisions in Estimates

Our profit recognition related to construction contracts is based on estimates of costs to complete each project. These estimates can vary significantly in the normal course of business as projects progress, circumstances develop and evolve, and uncertainties are resolved. When we experience significant changes in our estimates of costs to complete, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as revisions in estimates for the current period. We use the cumulative catch-up method applicable to construction contract accounting to account for revisions in estimates. Under this method, revisions in estimates are accounted for in their entirety in the period of change. There can be no assurance that we will not experience further changes in circumstances or otherwise be required to revise our cost estimates in the future.

In our review of these changes for the three months ended June 30, 2017 and for the three and six months ended June 30, 2016, we did not identify any material amounts that should have been recorded in a prior period. In our review of these changes for the six months ended June 30, 2017, we identified and corrected amounts that should have been recorded during the three months ended September 30, 2016. This correction resulted in a $4.9 million decrease to Large Project Construction revenue and gross profit and a $1.6 million increase in net loss attributable to Granite Construction Incorporated. We have assessed the impact of this correction to the financial statements of prior periods’ and to the financial statements for the six months ended June 30, 2017, and have concluded that the amounts were not material and are not expected to be material to the financial statements for the year ending December 31, 2017.

In the normal course of business, we have revisions in estimated costs some of which are associated with unresolved affirmative claims and back charges. The estimated or actual recovery related to these estimated costs associated with unresolved affirmative claims and back charges may be recorded in future periods, which can cause fluctuations in the gross profit impact from revisions in estimates.

Affirmative Claims

Revisions in estimates for the three and six months ended June 30, 2017 included increases in revenue of $12.2 million and $14.0 million, respectively, related to the estimated cost recovery of customer affirmative claims, which included increases of $11.4 million and $14.1 million, respectively, which were also affected by an increase in estimated contract costs in excess of the estimated recovery during the three and six months ended June 30, 2017, respectively. The remaining $0.8 million and offsetting decrease of $0.1 million, respectively, had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.

Revisions in estimates for the three and six months ended June 30, 2016 included increases in revenue of $17.4 million and $20.2 million, respectively, related to the estimated cost recovery of customer affirmative claims, which included increases of $15.3 million that were also affected by an increase in estimated contract costs in excess of the estimated recovery during both the three and six months ended June 30, 2016. The remaining $2.1 million and $4.9 million, respectively, had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.

Back Charges

Revisions in estimates for the three and six months ended June 30, 2017 included a reduction of cost of revenue of $2.7 million and $3.0 million, respectively, related to the estimated recovery of back charges of which $1.4 million was also affected by an increase in estimated contract costs that were in excess of the estimated recovery during both the three and six months ended June 30, 2017. The remaining $1.3 million and $1.6 million, respectively, had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.

Revisions in estimates for both the three and six months ended June 30, 2016 included a reduction of cost of revenue of $7.6 million related to the estimated recovery of back charges of which $2.2 million was also affected by an increase in estimated contract costs that were in excess of the estimated recovery during both the three and six months ended June 30, 2016. The remaining $5.4 million had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.

The tables below include the impact to gross profit from significant revisions in estimates related to estimated and actual recovery of customer affirmative claims and back charges as well as the associated estimated contract costs.

Construction

The changes in project profitability from revisions in estimates which individually had an impact of $1.0 million or more on gross profit were decreases of $1.1 million and $1.8 million for the three and six months ended June 30, 2017, respectively. The changes for the three and six months ended June 30, 2016 were decreases of $1.0 million and $2.5 million, respectively. There were no increases in project profitability from revisions in estimates, which individually had an impact of $1.0 million or more on gross profit during the three and six months ended June 30, 2017 and 2016. The projects are summarized as follows:

Decreases



	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in millions)		2017		2016		2017		2016
Number of projects with downward estimate changes		1		1		1		2
Range of reduction in gross profit from each project, net	$	1.1	$	1.0	$	1.8	$	1.2 - 1.3
Decrease on project profitability	$	1.1	$	1.0	$	1.8	$	2.5

The decreases during the three and six months ended June 30, 2017 and June 2016 were due to additional costs and lower productivity than originally anticipated.

Large Project Construction

The changes in project profitability from revisions in estimates, both increases and decreases, which individually had an impact of $1.0 million or more on gross profit were decreases of $23.8 million and $37.8 million for the three and six months ended June 30, 2017, respectively. The net changes for the three and six months ended June 30, 2016 were net decreases of $4.8 million and $7.8 million, respectively. Amounts attributable to non-controlling interests were $0.4 million and $2.0 million of the decrease for the three and six months ended June 30, 2017, respectively, and were $3.6 million of the net decreases for both the three and six months ended June 30, 2016. The projects are summarized as follows:

Increases



	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in millions)		2017		2016		2017		2016
Number of projects with upward estimate changes		—		2		—		4
Range of increase in gross profit from each project, net	$	—	$	2.9 - 6.9	$	—	$	1.2 - 6.9
Increase on project profitability	$	—	$	9.8	$	—	$	12.3

The increases during the three and six months ended June 30, 2016 were due to estimated recovery from back charge claims and higher productivity than originally anticipated as well as owner-directed scope changes during the six month period.

Decreases



	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in millions)		2017		2016		2017		2016
Number of projects with downward estimate changes		5		4		7		4
Range of reduction in gross profit from each project, net	$	1.1 - 8.1	$	2.2 - 5.9	$	1.0 - 10.8	$	3.4 - 6.4
Decrease on project profitability	$	23.8	$	14.6	$	37.8	$	20.1

The decreases during the three and six months ended June 30, 2017 were due to higher costs than originally anticipated as well as additional design, weather and owner-related costs, net of estimated and actual recovery from customer affirmative claims and back charges. The decreases during the three and six months ended June 30, 2016 were due to additional design, weather and owner-related costs and lower productivity than originally anticipated. As of June 30, 2017, there were projects for which additional costs, including liquidated damages, were reasonably possible but the range of costs was not estimable. The range will be determined as the projects proceed, and the outcomes could have a material effect on our financial position, results of operations and /or cash flows in the future.