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 year ended December 31, 2017 we identified and corrected amounts that should have been recorded during the year ended December, 31, 2016. This correction resulted in a $4.9 million decrease to Large Project Construction revenue and gross profit and a $1.6 million decrease in net income 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 year ended December 31, 2017 and have concluded that the amounts are not material. In our review of these changes for the years ended 2016 and 2015, we did not identify any material amounts that should have been recorded in a prior period.

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 or may be at values below the associated cost, which can cause fluctuations in the gross profit impact from revisions in estimates.

Affirmative Claims

Revisions in estimates for the years ended December 31, 2017, 2016 and 2015, included increases in revenue of $34.9 million, $37.3 million and $48.5 million, respectively, related to the estimated cost recovery of customer affirmative claims. Of these totals, $30.9 million, $25.4 million and $37.3 million, were offset by an increase in estimated contract costs that were in excess of the estimated recovery during the years ended December 31, 2017, 2016 and 2015, respectively. For the remaining $4.0 million, $11.9 million and $11.2 million, respectively, estimated contract costs in excess of estimated cost recovery were recorded in prior periods.

Back Charges

Revisions in estimates for the years ended December 31, 2017, 2016 and 2015, included reduction of cost of revenue of $4.6 million, $15.7 million and $7.0 million, respectively, related to the estimated recovery of back charges. Of these totals, $2.5 million, $4.8 million and $0.5 million, were offset by an increase in estimated contract costs that were in excess of the estimated recovery during the years ended December 31, 2017, 2016 and 2015, respectively. For the remaining $2.1 million, $10.9 million and $6.5 million, respectively, estimated contract costs in excess of estimated cost recovery 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

Increases



Years Ended December 31,		2017		2016		2015
Number of projects with upward estimate changes		10		7		14
Range of increase in gross profit from each project, net	$	1.1 - 3.9	$	1.1 - 4.8	$	1.1 - 6.6
Increase on project profitability	$	17.2	$	14.2	$	30.7

The increases during the years ended December 31, 2017, 2016 and 2015 were due to lower costs and higher productivity than originally anticipated and owner directed scope changes. The 2017 and 2016 increases were also due to estimated cost recovery from affirmative claims.

Decreases



Years Ended December 31,		2017		2016		2015
Number of projects with downward estimate changes		6		7		5
Range of reduction in gross profit from each project, net	$	1.0 - 4.4	$	1.0 - 3.9	$	1.0 - 3.3
Decrease on project profitability	$	13.2	$	12.9	$	10.8

The decreases during the years ended December 31, 2017, 2016 and 2015 were due to additional costs and lower productivity than originally anticipated. The 2017 decreases were also due to increases in estimated cost to complete from outstanding affirmative claims and change orders.

Large Project Construction

The net 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 net decreases of $66.6 million and $13.5 million and a net increase of $7.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Amounts attributable to non-controlling interests were $2.1 million and $4.3 million of the net decreases and $3.0 million of the net increase for the years ended December 31, 2017, 2016 and 2015, respectively. The projects are summarized as follows (dollars in millions):

Increases



Years Ended December 31,		2017		2016		2015
Number of projects with upward estimate changes		1		8		7
Range of increase in gross profit from each project, net	$	2.0	$	1.2 - 6.5	$	1.5 - 6.7
Increase on project profitability	$	2.0	$	27.2	$	27.9

The increases during the years ended December 31, 2017 and 2016 were due to higher productivity and lower costs than anticipated and settlement of affirmative claims as well as estimated cost recovery from affirmative claims during 2016. The increases during the year ended December 31, 2015 were due to owner-directed scope changes and lower costs than anticipated, as well as estimated cost recovery from affirmative claims.

Decreases



Years Ended December 31,		2017		2016		2015
Number of projects with downward estimate changes		7		5		6
Range of reduction in gross profit from each project, net	$	1.3 - 17.2	$	1.3 - 13.6	$	1.0 - 5.5
Decrease on project profitability	$	68.6	$	40.7	$	20.3

The decreases during the years ended December 31, 2017, 2016 and 2015 were primarily due to additional design, weather and owner-related costs and lower productivity than originally anticipated, net of estimated and actual recovery from customer affirmative claims and back charges. As of December 31, 2017, there were three projects for which additional costs were reasonably possible in excess of the probable amounts included in the cost forecast. The reasonably possible aggregate range that has the potential to adversely impact gross profit during the year ended December 31, 2018 was zero to $44.0 million. As the related projects proceed, future estimates may change and could have a material effect on our financial position, results of operations and/or cash flows in the future.