Mega Builders plc (Mega), a civil engineering contractor, has been invited to tender for a major contract. Work on the contract must start in January 20X6 and be completed by 31 December 20X7. The contract price will be receivable in three equal annual instalments, on 31 December 20X6, 20X7 and 20X8. Mega’s management has reason to believe that the client will probably not accept a tender price in excess of £13.5m.

It is estimated that the contract will require 250,000 hours of non-management labour, in each of the two years 20X6 and 20X7, paid at an hourly rate of £10 and hired for the duration of the contract.