Revenue Over Time: Accounting for Long-Term Contracts

Introduction

Lockheed Martin recorded $75.0 billion of sales in 2025, and it accounts for substantially all of its contracts by recognizing revenue over time, as work progresses, using the costs it has incurred as a share of the costs it expects to incur in total. That method makes its earnings depend on estimates of programs that run for years or decades. In 2025 the company recognized reach-forward losses of $950 million on a classified aeronautics program, $570 million on a Canadian maritime helicopter program and $95 million on a Turkish utility helicopter program, each recognized in full in the quarter the higher cost estimate became evident.

Long-term contracts are where revenue recognition is most dependent on judgment. Revenue is not recognized when a customer takes delivery of a finished product, but gradually as the product is built, and the amount recognized each period rests on management's estimate of how far along the work is and what it will cost to finish. The framework sits within the five-step model of Accounting Standards Codification (ASC) 606, explained in revenue recognition under ASC 606; long-term contracts are where its fifth step, recognizing revenue as each obligation is satisfied, plays out over many periods.

Under ASC 606, a performance obligation is satisfied over time if any one of three conditions is met: the customer simultaneously receives and consumes the benefit as the company performs, as with a cleaning or maintenance service; the company's work creates or enhances an asset the customer controls as it is built, such as a building on the customer's land; or the work creates an asset with no alternative use to the company and the company has an enforceable right to payment for performance completed to date. Defense contracts usually qualify under the second or third condition. Lockheed's US government contracts give the customer ownership of work in process and a right to cancel for convenience while paying costs plus a reasonable profit; its international commercial contracts rely on products with no alternative use and a right to payment for work done, plus a reasonable profit, if the customer cancels.

Over-time revenue recognition

Recognition of revenue progressively as a performance obligation is satisfied, rather than at a single point in time, using a measure of progress such as costs incurred or units delivered. It applies when the customer receives benefits as the company performs, controls the asset as it is created, or the asset has no alternative use and the company has a right to payment for work completed.

If none of the conditions applies, revenue is recognized at a point in time, usually on delivery. Commercial aircraft manufacturers, for example, typically recognize revenue when each aircraft is delivered, because an airliner built for one airline can generally be remarketed to another, while defense contractors building to government specifications usually recognize revenue over time.

The most common measure of progress on long-term contracts is an input method based on costs: the share of total expected costs incurred to date determines the share of the contract price recognized as revenue. The rest of revenue recognition follows from that ratio:

Suppose a company signs a fixed-price contract for $1,000, expecting to incur $800 of costs over three years, a 20% margin. In year one it incurs $240. In year two, after incurring a further $360, it revises its estimate of total costs to $960. Year three's costs come in exactly at the revised estimate:

Year one recognizes $300 of revenue, 30% of the price, and $60 of profit at the original 20% margin. In year two, the cost overrun cuts the expected total profit from $200 to $40. The contract is now 62.5% complete, so cumulative revenue should be $625 and cumulative profit $25. Because $60 of profit was already recognized, year two must record a $35 loss to bring the cumulative figure down to $25, even though the contract as a whole remains profitable. Year three recognizes the remaining $15. Over the life of the contract, revenue totals $1,000 and profit $40, but its timing has been reshaped by the change in estimate.

Output Methods and Adjustments to Inputs

Output methods measure progress by results delivered to the customer, such as units produced, milestones reached or surveys of work performed. They suit contracts where each unit transfers a similar amount of value, such as a production run of identical vehicles. Input methods suit contracts where effort is a better guide than visible output, such as design and development work.

Costs that do not reflect progress are excluded from cost-to-cost calculations. Wasted materials, labor inefficiencies and other unexpected costs that do not contribute to satisfying the obligation do not increase the percentage complete. And when significant materials are delivered to a site before they are installed, a contractor may recognize revenue only equal to their cost, with no margin, until they are used, so that a large equipment purchase does not inflate progress overnight.

The year-two loss in the example is a cumulative catch-up adjustment: a change in the estimate of total costs or of the transaction price is applied to the entire contract to date, and the whole effect lands in the period of the change. Lockheed's 2025 annual report describes these as profit booking rate adjustments, recognized in the period they are determined and reflecting the inception-to-date effect of the change.

Because large contractors carry thousands of contracts, the adjustments are usually reported net. Lockheed's net profit booking rate adjustments increased segment operating profit by about $75 million in 2025, after reducing it by $180 million in 2024 and increasing it by $1.59 billion in 2023. The swing from 2023 to 2024, more than $1.7 billion at the operating profit level, reflects changes in estimates rather than changes in the volume of work, which is why bankers analyze contractors' margins with and without these adjustments.

One rule overrides the gradual pattern. When the estimated total costs of a construction-type or production-type contract exceed its expected revenue, the company must recognize the entire expected loss immediately, not in proportion to progress. The provision for loss contracts comes from the long-standing guidance in ASC 605-35, which the Financial Accounting Standards Board (FASB) retained when it adopted ASC 606, as Deloitte's discussion of onerous performance obligations explains. Companies measure the loss at either the contract or the performance obligation level, as a consistently applied policy election; Lockheed measures it per contract.

Reach-forward loss

The full loss expected on a contract, recognized in the period in which estimated total costs are first expected to exceed the contract's revenue, rather than spread over the remaining work. The term is common among defense and aerospace contractors.

Suppose a $1,000 fixed-price contract is 30% complete when the estimate of total costs rises to $1,100. The expected loss is $100, and all of it is recognized at once. Cumulative revenue is $300, 30% of the price, against costs to date of $330, a $30 loss on the work done, and the remaining $70 is recorded as a loss provision covering the work still to come. As the remaining work is performed, the provision absorbs the excess costs, so the later years show no further loss unless estimates worsen again.

This is the rule behind Lockheed's reach-forward losses. In 2024, the company recognized losses of $1.4 billion on a classified program in its missiles segment and $555 million on a classified aeronautics program; in 2025, a further $950 million on the aeronautics program and $665 million on two international helicopter programs. Fixed-price development contracts carry the most exposure, because the contractor must estimate the cost of something that has not yet been built, and bears the overruns.

For analysis, over-time accounting means that a contractor's reported profit is an estimate of contract economics that can change quarter to quarter. Bankers look at several signals together:

Contract assets deserve particular attention, because they are where over-optimistic progress estimates accumulate before any write-down; how they differ from receivables and contract liabilities is explained in contract liabilities and contract assets.

For valuation, bankers usually normalize margins by removing large one-off estimate changes and loss provisions, while recognizing that some level of adjustment is recurring in any contractor with a large portfolio. Industry practice in engineering and construction is covered in construction and long-term contracts. The core point holds across all of them: on long-term contracts, revenue and profit follow management's estimates of progress and cost, and the cumulative catch-up and the loss rule decide when changes in those estimates reach the income statement.