CONTRACT COSTING

Contract Costing defined:

Contract costing is defined as that form of specific order costing where in work is carried out in accordance with customers special requirement and each order is of long duration

Is generally applied to contractors who undertake constructional work and engineering work like roads, dams, buildings, canals railway lines etc.

Features of Contract Costing:

Contract work is performed on the basis of agreement between the contractor and contractee. Contract generally takes more than one year (long period) for completion. For cost calculation and profits single contract is the cost unit. Working place is contract site not the factory generally. For completing the contract some parts of the work or job may be assigned to specialist known as sub contractor. If contractor fails to complete the work in time penalties may be imposed by the contractee for delay.
Contd.
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 Plant may be purchased or hired especially for the contract Employed by undertakings engaged in building, road & bridge construction, ship building, etc.

Work carried out at site and not in factory premises

Payments made based on stages of completion and depends on Architects Certificate May contain Escalation Clause and Penalty Clause
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Concepts relating to Contract Accounts:

Contractor: Person who undertakes the task of doing the job
Contractee:

Person on whose behalf the task is being done

Contract Price: Value for which the contract is undertaken Work certified: Part of the total contract price which is has been completed and approved by the architect
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 Material
Debit 1. Material required Credit 1. Material returned 2. Sale of material

3. Unutilized Material
4. Material stolen or destroyed

1. 2. 3.

Material unutilized carried forward. Transfer of material from one contract to another. Profit & loss on sell of material transferred to P&L account.

 Wages

1.
2.

Directly allocated to the contract. Contract account Debit - Accrued & outstanding wages.
Expenses Other than material & wages. E.g. architects/consultants fees, electricity, insurance.

1. 2.

 Plant

1.
2. 3.

4.

& machinery Cost of plant debited Sale proceeds/revalued amount credited. Drawback: inflated debit side. Contract account charged with plant depreciation.

Sub-contract 1. 2.

Charged directly to the main contract. Material issued, heavy tools & equipments.

Concepts relating.
Uncertified Work: Part of the task done but not approved by the architect of the Contractee Cash Paid: Part of the work certified that is paid by the Contractee Retention Money: Part of the work certified that is held back by the Contractee
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Notional Profit:
Difference between the value of work certified and uncertified less the cost of work done to date Value of work certified Add Value of work not yet certified Less Cost of work to date

Estimated Profit:
Excess of the contract price over the estimated total cost of the contract Contract Price Less Total cost already incurred Less Estimated additional cost required to complete the contract

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Profit on Incomplete Contracts:

(a) When work certified is less than 25% complete
No profit or Loss be accounted for

(b) When work certified is 25 % or more but less than 50% Notional Profit X 1/3 X Cash received -------------------Work Certified

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Profit on Incomplete Contracts:

(c) When work certified is the 50% or more but less
than 90% Notional Profit X 2/3 X Cash received -------------------Work Certified

(d) When the contractor estimates the profit: Estimated Profit X Work Certified --------------------Contract Price
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