NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues have been recorded but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of the contract. Also included in costs and estimated earnings on uncompleted contracts are amounts EMCOR seeks or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). These amounts are recorded at their estimated net realizable value when realization is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection with these amounts. Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded unapproved change orders may be made in the near term. Claims made by EMCOR involve negotiation and, in certain cases, litigation. EMCOR expenses litigation costs as incurred, although it may seek to recover these costs as part of its claim. EMCOR believes that it has established legal basis for pursuing recovery of recorded claims, and it is management’s intention to pursue and litigate these claims, if necessary, until a decision or settlement is reached. Claims also involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded claims may be made in the near term. Claims against EMCOR are recognized when a loss is considered probable and amounts are reasonably determinable. As of December 31, 2001, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $48.4 million and claims of approximately $51.7 million. In addition, accounts receivable as of December 31, 2001 include claims and contractually billed amounts related to such contracts of approximately $40.6 million. Generally, contractually billed amounts will not be paid by the customer to EMCOR until final resolution of related claims. In accordance with industry practice, EMCOR classifies as current all assets and liabilities related to the performance of long-term contracts. The contracting cycle for certain long- term contracts may extend beyond one year and, accordingly, collection or payment of amounts related to these contracts may extend beyond one year. Accounts receivable at December 31, 2001 and 2000 included $138.6 million and $160.9 million, respectively, of retainage billed under terms of the contracts. EMCOR estimates that approximately 75% of retainage recorded at December 31, 2001 will be collected during 2002. Classification of Contract Amounts NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued) Costs and Estimated Earnings on Uncompleted Contracts Costs and estimated earnings on uncompleted contracts and related amounts billed as of December 31, 2001 and 2000 were as follows (in thousands): EMCOR ANNUAL REPORT 2001  31 Such amounts were included in the accompanying Consolidated Balance Sheets at December 31, 2001 and 2000 under the following captions (in thousands): 2001 2000 Costs incurred on uncompleted contracts $ 4,779,515) $ 5,552,430) Estimated earnings 485,394) 403,416) 5,264,909) 5,955,846) Less: billings to date 5,362,802) 6,112,702) $ (97,893) $ (156,856) 2001 2000 Costs and estimated earnings in excess of billings  on uncompleted contracts $ 221,272) $ 158,073) Billings in excess of costs  and estimated earnings  on uncompleted contracts (319,165) (314,929) $ (97,893) $ (156,856)