4. 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. For revisions in estimates, generally we use the cumulative catch-up method for changes to the transaction price that are part of a single performance obligation. 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 and nine months ended September 30, 2018 and for the three months ended September 30, 2017, we did not identify any material amounts that should have been recorded in a prior period. In our review of these changes for the nine months ended September 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 Specialty 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’ as well as to the financial statements for the nine months ended September 30, 2017 and the year ended December 31, 2017 and have concluded that the amounts were immaterial.

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 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 three and nine months ended September 30, 2018 included net increases in revenue of $1.2 million and $6.1 million, respectively, related to the estimated cost recovery of customer affirmative claims, which included increases of $0.2 million and $8.7 million, respectively, that were also affected by an increase in estimated contract costs in excess of the estimated recovery during the three and nine months ended September 30, 2018. The remaining increase of $1.0 million and offsetting decrease of $2.6 million, respectively, had estimated contract costs in excess of the estimated cost recovery that were recorded in prior periods.

Revisions in estimates for the three and nine months ended September 30, 2017 included net increases in revenue of $11.5 million and $25.5 million, respectively, related to the estimated cost recovery of customer affirmative claims, which included increases of $11.0 million and $25.1 million, respectively, that were also affected by an increase in estimated contract costs in excess of the estimated recovery during the three and nine months ended September 30, 2017. The remaining increases of $0.5 million and $0.4 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 nine months ended September 30, 2018 included reductions in cost of revenue of $1.6 million and $3.6 million, respectively, related to the estimated recovery of back charges of which $1.4 million and $2.5 million, respectively, had estimated contract costs in excess of estimated cost recovery during the three and nine months ended September 30, 2018. The remaining reduction in cost of revenue of $0.2 million and $1.1 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 nine months ended September 30, 2017 included reductions in cost of revenue of $0.6 million and $3.6 million, respectively, related to the estimated recovery of back charges of which $0.6 million and $2.0 million, respectively, had estimated contract costs in excess of estimated cost recovery during the three and nine months ended September 30, 2017. The remaining reduction in cost of revenue of $1.6 million during the nine months ended September 30, 2017 had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.

The table below includes 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 impact to gross profit from changes in estimated contract revenue and costs.

The changes in project profitability from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit, were decreases of $19.3 million and $57.8 million for the three and nine months ended September 30, 2018, respectively. The changes for the three and nine months ended September 30, 2017 were decreases of $12.7 million and $56.8 million, respectively. All decreases were in our Transportation segment except for one decrease of $5.9 million during the nine months ended September 30, 2017 which was in our Specialty segment. There were no increases from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit, for the periods presented. The projects are summarized as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)		2018			2017			2018			2017
Number of projects with downward estimate changes			2			1			4			6
Range of reduction in gross profit from each project, net	$	7.3 - 12.0		$		12.7	$	5.2 - 25.6		$	5.1 - 14.5
Decrease to project profitability	$		19.3	$		12.7	$		57.8	$		56.8

The decreases during the three and nine months ended September 30, 2018 and 2017 were due to additional costs and lower productivity than originally anticipated as well as additional weather related costs and a decrease in estimated recovery from customer affirmative claims.

There were no amounts attributable to non-controlling interests for the three and nine months ended September 30, 2018 and the three months ended September 30, 2017. Amounts attributable to non-controlling interests were $2.1 million of the decreases for the nine months ended September 30, 2017.

As of September 30, 2018 there were four 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 is zero to $45.0 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.