AECON GROUP INC 23 if these assumptions prove incorrect whether due to faulty estimates unanticipated circumstances or a failure to properly assess risk proft may be materially lower than anticipated or in a worst case scenario result in a signifcant loss The recording of the results of large project contracts can distort revenues and earnings on both a quarterly and an annual basis and can in some cases make it diffcult to compare the fnancial results between reporting periods For greater detail of the potential impact of contractual factors including unpriced change orders please see Contractual Factors under Risk Factors herein Aecon has a number of commitments and contingencies If Aecon was called upon to honour these contingent obligations its fnancial results would be adversely affected For additional details see Note 23 Contingencies and Note 24 Commitments Under Non Cancellable Operating Leases to the Companys 2012 consolidated fnancial statements fled on its SEDAR profle at wwwsedarcom The failure to replace the revenue generated from these large projects on a going forward basis could adversely affect Aecon CONTRACTUAL FACTORS Aecon performs construction activities under a variety of contracts including lump sum fxed price guaranteed maximum price cost reimbursable and designbuild Some forms of construction contracts carry more risk than others Historically a substantial portion of Aecons revenue is derived from lump sum contracts pursuant to which a commitment is provided to the owner of the project to complete the project at a fxed price Lump Sum or guaranteed maximum price GMP In Lump Sum and GMP projects in addition to the risk factors of a unit price contract as described below any errors in quantity estimates or schedule delays or productivity losses for which contracted relief is not available must be absorbed within the Lump Sum or GMP thereby adding a further risk component to the contract Such contracts given their inherent risks have from time to time resulted in signifcant losses The failure to properly assess a wide variety of risks appropriately execute such contracts or contractual disputes may have an adverse impact on fnancial results Aecon is also involved in fxed unit price construction contracts under which the Company is committed to provide services and materials at a fxed unit price eg dollars per tonne of asphalt or aggregate While this shifts the risk of estimating the quantity of units to the contract owner any increase in Aecons cost over the unit price bid whether due to estimating error ineffciency in project execution inclement weather infation or other factors will negatively affect Aecons proftability In certain instances Aecon guarantees to a customer that it will complete a project by a scheduled date or that the facility will achieve certain performance standards If the project or facility subsequently fails to meet the schedule or performance standards Aecon could incur additional costs or penalties commonly referred to as liquidated damages Although Aecon attempts to negotiate waivers of consequential or liquidated damages on some contracts the Company is required to undertake such damages for failure to meet certain contractual provisions Such penalties may be signifcant and could impact Aecons fnancial position or results of future operations Furthermore schedule delays may also reduce proftability because staff may be prevented from pursuing and working on new projects Project delays may also reduce customer satisfaction which could impact future awards Aecon is also involved in designbuild contracts or certain contracts for owners such as Infrastructure Ontario and Partnerships British Columbia where in addition to the responsibilities and risks of a unit price or lump sum construction contract Aecon is responsible for certain aspects of the design of the facility being constructed This form of contract adds the risk of Aecons liability for design errors as well as additional construction costs that might result from such design errors Certain of Aecons contractual requirements may also involve fnancing elements where Aecon is required to provide one or more letters of credit performance bonds fnancial guarantees or equity investments There can be no assurance on a going forward basis that Aecon will be able to obtain the necessary fnancing on favourable or commercially reasonable terms and conditions for such equity investments nor that its working capital and bonding facilities will be adequate in order to issue the required letters of credit and performance bonds See Access to Bonding Prequalifcation Rating and Letters of Credit under Risk Factors herein Change orders which modify the nature or quantity of the work to be completed are frequently issued by clients Final pricing of these change orders is often negotiated after the changes have been started or completed As such disputes regarding the quantum of unpriced change orders could impact Aecons proftability on a particular project its ability to recover costs or in a worst case scenario result in signifcant project losses Until pricing has been agreed these change orders are referred to as unpriced change orders Revenues from unpriced change orders are recognized to the extent of the costs incurred on executing the change order or if lower to the extent to which recovery is probable Only when pricing is agreed to is any proft on such change orders recognized If ultimately there are disputes with clients on the pricing of change orders or disputes regarding additional payments owing as a result of changes in contract specifcations delays additional work or changed conditions Aecons accounting policy is to record all costs for these changes but not to record any revenues anticipated from these disputes until resolution is probable The timing of the resolution of such events can have a material impact on income and liquidity and thus can cause fuctuations in the revenue and income of Aecon in any one reporting period AECON OPERATES IN A HIGHLY COMPETITIVE INDUSTRY Aecon operates businesses in highly competitive product and geographic markets in Canada the United States and internationally Aecon competes with other major contractors as well as many midsize and smaller companies across a range of industry segments In addition an increase in the number of international companies entering into the Canadian marketplace has also made the market more competitive Each has its own advantages and disadvantages relative to Aecon New contract awards and contract margin are dependent on the level of competition and the general state of the markets in which the Company operates Fluctuations in demand in the segments in which the Company operates may impact the degree of competition for work Competitive position is based on a multitude of factors including pricing ability to obtain adequate bonding backlog fnancial strength appetite for risk and reputation for quality timeliness and experience Aecon has little control over and cannot otherwise affect these competitive factors If the Company is unable to effectively respond to these competitive factors results