Contract Costing
Introduction:
• Contract costing is a type of job costing in which a contract constitutes a unit of cost.
• Contract costing, which is otherwise called terminal costing, is adopted by those business undertakings which undertake definite contracts.
• CIMA - Contract cost as ‘the aggregated costs relative to a single contract designated as a cost unit.’
Features of Contract Costing:
• Each contract is considered as a separate unit of cost.
• A separate ledger account is kept for each contract and is allotted a unique number.
• Usually the contract work is carried out at the customer’s site.
• A contract usually takes more than one accounting year to complete.
• Normally the entire labor cost is directly chargeable to the contract.
• Plant and equipment may be purchased or hired for the contract work.
• Penalties may be incurred by the contractor for failing to complete the work within the specified period.
Contract Costing and Job Costing:
• Duration of Work
• Place of Activity
• Nature of Work
• Cost Unit
• Cost Ascertainment
• Profit Recognition
• Pricing
Accounting Procedure:
• Materials
• Direct Labour
• Direct Expenses
• Indirect Expenses or Overheads
• Plant and Machinery
• Subcontract cost
• Extra Work Done
• Escalation Clause
Escalation clause:
• The clause is provided in the contract to cover up any changes in the price of materials, labour, etc. Since the contracts generally take more than one year to complete, the object of incorporating this clause is to safeguard the interest of both the parties against unfavorable changes in prices.
De-escalation clause:
• A de-escalation clause may be inserted in the agreement to take care of the interest of the contractee. It provides for downward revision of the contract price in case the cost goes down beyond a certain agreed level or the quantity of materials and labor-time reduce from an estimated level.
Cost plus Contract:
• It is a modified method of contract costing.
• This method of costing is used when it is not possible to determine the cost of the contract in advance with a reasonable degree of accuracy.
• The cost plus contract is useful in the following situations:
– When it is difficult to estimate the cost of a contract due to the cost fluctuations or the long period of time required to execute the contract, or
– When the probable cost of contract cannot be estimated in advance with a reasonable degree of accuracy, or
– When the contract is absolutely new to the contractor.
• Contract Price
– It is the value of the contract which is agreed to be paid to the contractor by the contractee when the contract is satisfactory completed.
Work Certified:
• Both the contractor and the contractee are interested in getting the work certified due to the following:
– It helps to monitor the progress of work done.
– It is a basis of payment to be made by the contractee.
– It facilitates the estimation of profit.
– It helps to get loans against work certified.
• Work certified always has a cumulative value. It is a part of the work done, generally in percent. It is always valued at the contract price.
Work Uncertified:
• Work uncertified is the value of work done, but not certified by the architect.
Retention money:
• To put the contractee in a favorable position to take care of any faulty work that may arise or to recover penalty that may recoverable on account of late completion. This also ensures the contractee that the contractor will continue to work and not leave the contract incomplete.
Work-in-progress (WIP):
• Incomplete contracts are referred to as work-in-progress. It includes the cost of certified work, cost of uncertified work, the value of plant at site, and the cost of materials at site.
Reference:
ICSI
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