||Note 4: revenueS
Revenues are measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect are excluded from revenues. Costs to obtain and fulfill contracts (primarily asphalt construction paving contracts) are immaterial and are expensed as incurred when the expected amortization period is one year or less.
Total revenues are primarily derived from our product sales of aggregates (crushed stone, sand and gravel, sand and other aggregates), asphalt mix and ready-mixed concrete, and include freight & delivery costs that we pass along to our customers to deliver these products. We also generate service revenues from our asphalt construction paving business and service revenues related to our aggregates business, such as landfill tipping fees. Our total service revenues were $39,564,000 and $34,515,000 for the three months ended March 31, 2020 and 2019, respectively.
Our products typically are sold to private industry and not directly to governmental entities. Although approximately 45% to 55% of our aggregates shipments have historically been used in publicly-funded construction, such as highways, airports and government buildings, relatively insignificant sales are made directly to federal, state, county or municipal governments/agencies. Therefore, although reductions in state and federal funding can curtail publicly-funded construction, the vast majority of our aggregates business is not directly subject to renegotiation of profits or termination of contracts with state or federal governments.
Our segment total revenues by geographic market for the three month periods ended March 31, 2020 and 2019 are disaggregated as follows:
Three Months Ended March 31, 2020
Total Revenues by Geographic Market 1
Three Months Ended March 31, 2019
Total Revenues by Geographic Market 1
The geographic markets are defined by states/countries as follows:
East market — Arkansas, Delaware, Illinois, Kentucky, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and Washington D.C.
Gulf Coast market — Alabama, Florida, Georgia, Louisiana, Mexico, Mississippi, Oklahoma, South Carolina and Texas
West market — Arizona, California and New Mexico
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs at a point in time when our aggregates, asphalt mix and ready-mixed concrete are shipped/delivered and control passes to the customer. Revenue for our products is recorded at the fixed invoice amount and payment is due by the 15th day of the following month — we do not offer discounts for early payment.
Freight & delivery generally represents pass-through transportation we incur (including our administrative costs) and pay to third-party carriers to deliver our products to customers and are accounted for as a fulfillment activity. Likewise, the costs related to freight & delivery are included in cost of revenues.
Freight & delivery revenues are as follows:
Three Months Ended
Freight & Delivery Revenues
Freight & delivery revenues 1
Total revenues excluding freight & delivery
Includes freight & delivery to remote distribution sites.
CONSTRUCTION PAVING SERVICE REVENUES
Revenue from our asphalt construction paving business is recognized over time using the percentage-of-completion method under the cost approach. The percentage of completion is determined by costs incurred to date as a percentage of total costs estimated for the project. Under this approach, recognized contract revenue equals the total estimated contract revenue multiplied by the percentage of completion. Our construction contracts are unit priced, and an account receivable is recorded for amounts invoiced based on actual units produced. Contract assets for estimated earnings in excess of billings, contract assets related to retainage provisions and contract liabilities for billings in excess of costs are immaterial. Variable consideration in our construction paving contracts is immaterial and consists of incentives and penalties based on the quality of work performed. Our construction paving contracts may contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from nine months to one year after project completion. Due to the nature of our construction paving projects, including contract owner inspections of the work during construction and prior to acceptance, we have not experienced material warranty costs for these short-term warranties.
VOLUMETRIC PRODUCTION PAYMENT DEFERRED REVENUES
In 2013 and 2012, we sold a percentage interest in certain future aggregates production for net cash proceeds of $226,926,000. These transactions, structured as volumetric production payments (VPPs):
relate to eight quarries in Georgia and South Carolina
provide the purchaser solely with a nonoperating percentage interest in the subject quarries’ aggregates production
contain no minimum annual or cumulative guarantees by us for production or sales volume, nor minimum sales price
are both volume and time limited (we expect the transactions will last approximately 25 years, limited by volume rather than time)
We are the exclusive sales agent for, and transmit quarterly to the purchaser the proceeds from the sale of, the purchaser’s share of aggregates production. Our consolidated total revenues exclude the revenue from the sale of the purchaser’s share of aggregates.
The proceeds we received from the sale of the percentage interest were recorded as deferred revenue on the balance sheet. We recognize revenue on a unit-of-sales basis (as we sell the purchaser’s share of production) relative to the volume limitations of the transactions. Given the nature of the risks and potential rewards assumed by the buyer, the transactions do not reflect financing activities.
Reconciliation of the VPP deferred revenue balances (current and noncurrent) is as follows:
Three Months Ended
Balance at beginning of year
Revenue recognized from deferred revenue
Balance at end of period
Based on expected sales from the specified quarries, we expect to recognize $7,500,000 of VPP deferred revenue as income during the 12-month period ending March 31, 2021 (reflected in other current liabilities in our March 31, 2020 Condensed Consolidated Balance Sheet).