12. Commitments and contingencies

Litigation

        The Company is involved in various legal proceedings, including the matters described below, in the ordinary course of its business.

        In March 2009, a state Medicaid agency asserted a claim against MAXIMUS, related to a discontinued business line, in the amount of $2.3 million in connection with a contract MAXIMUS had through February 1, 2009 to provide Medicaid administrative claiming services to school districts in the state. MAXIMUS entered into separate agreements with the school districts under which MAXIMUS helped the districts prepare and submit claims to the state Medicaid agency which, in turn, submitted claims for reimbursement to the United States Federal Government. No legal action has been initiated. The state has asserted that its agreement with MAXIMUS requires the Company to reimburse the state for the amounts owed to the Federal Government. However, the Company's agreements with the school districts require them to reimburse MAXIMUS for such payments and therefore MAXIMUS believes the school districts are responsible for any amounts disallowed by the state Medicaid agency or the Federal Government. Accordingly, the Company believes its exposure in this matter is limited to its fees associated with this work and that the school districts will be responsible for the remainder. MAXIMUS has exited the federal health care claiming business and no longer provides the services at issue in this matter.

        In 2008, MAXIMUS sold the SchoolMAX student information system business line as part of the divestiture of the MAXIMUS Education Systems division. In 2012, a school district ("District") which was a SchoolMAX client filed a formal arbitration notice alleging that MAXIMUS and the buyer failed to (i) use best practices in developing the software and (ii) deliver and test product releases as required by the contract. The District contended that those failures resulted in damages of at least $10 million. In December 2012, the arbitration panel denied the District's claims in their entirety. Costs related to the arbitration proceeding have been included within discontinued operations. The District subsequently filed a motion to vacate the decision of the arbitration panel which was denied by the court in July 2013. The District has appealed that ruling. Separately, in late 2012, the District asserted that MAXIMUS had defrauded the District in 2007 or 2008 by misrepresenting its intentions regarding the sale of the Education Systems division. That allegation was not part of the arbitration, and no formal claim or lawsuit has been filed. The company believes it has a number of defenses to that allegation and would contest it vigorously if it were asserted.

Acquired loss-making contract

        As part of the acquisition of PSI in April 2012, the Company acquired a systems-integration contract that was anticipated to record significant future losses. The fair value of the obligation to provide these services at a loss was calculated and recorded on the Company's balance sheet at acquisition as deferred revenue of $15.1 million.

        The contract was an arrangement that included both significant production and customization of software as well as postcontract customer support for these services. As MAXIMUS was unable to estimate the costs of providing these services, management deferred all revenue and costs related until to service in anticipation of recognizing revenue at the commencement of the postcontract customer support services.

        In February 2013, the Company received a formal notice of termination for convenience for this contract. The work was terminated as part of a broad, state-wide initiative to focus resources on a select number of projects. At the termination of this agreement, the Company reimbursed the client for certain funds received and undertook to provide services in consideration for the termination. All other obligations to provide services have been extinguished and no material future costs will be incurred. Accordingly, revenue of $16.0 million has been recognized in the year ended September 30, 2013. In addition, costs of $5.1 million, including costs which had been deferred, were recognized in the same period for an operating profit of $10.9 million.

Flexible New Deal contract liabilities and contingent gains

        In August 2009, the Company commenced work for the United Kingdom government as a provider of services under the "Flexible New Deal," a welfare-to-work initiative. The work was performed in the Company's Human Services segment. This initiative was terminated for all contract providers during fiscal year 2011 and replaced with the Work Programme, under which MAXIMUS also performs services. As a consequence of the termination of the Flexible New Deal, MAXIMUS incurred certain costs related to the termination of leases, including property leases for offices that are no longer occupied by the Company but for which the Company then retained responsibility for future lease payments. For properties which were exited, the Company recognized a liability for future lease rentals, service charges and property taxes for which it was liable, offset by anticipated future sublease rentals. The Company initially recorded a reserve of $0.5 million at September 30, 2011 to cover these liabilities, which reserve was fully utilized by September 30, 2012.

        As part of the Flexible New Deal contract, MAXIMUS was entitled to reimbursement for costs incurred as a consequence of early termination, as well as a contract settlement for payments the Company would have received for realizing certain long-term goals under the contract. During the year ended September 30, 2012, MAXIMUS received a payment of $2.7 million for revenue foregone and $1.7 million of cost recoveries, net of subcontractor expenses.

Contracts

        During the year ended September 30, 2012, the Company recorded a gain of $6.8 million on a fixed-price contract owing to changes in our estimate to complete the work. During the year ended September 30, 2011, the Company recorded a charge of $7.3 million on the same contract. The Company has no further liabilities relating to anticipated losses on this contract.

        During the year ended September 30, 2012, the Company signed an amendment on a significant Health Services contract. As a consequence, the Company recognized additional revenue in the period of $10.2 million.

Employment agreements

        Subsequent to September 30, 2013, the Company signed an employment agreement with its chief executive officer with a term ending in fiscal 2018.

Collective bargaining agreements

        Approximately 12% of our employees are covered by collective bargaining agreements or similar arrangements.