CONTRACT COSTING

Contract Costing defined:

Method where each contract is treated as cost unit and Profit & Loss is ascertained separately.

Employed by undertakings engaged in building, road & bridge construction, ship building, etc.

Features of Contract Costing:

Large in size and takes more than one year for completion Involves two parties viz. Contractor and Contractee Contract executed for a price termed as Contract Price Each contract is a cost unit; expenses get separately recorded and profit too is separately ascertained

Expenses are chargeable directly to contract account

Specialist sub-contracts may be employed
Contd.
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 Plant may be purchased or hired especially for the contract 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

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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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

Profit on Incomplete Contracts: (transferred to P/L a/c)

(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: (transferred to P/L a/c)

(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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Cost plus Contract

When the probable cost of contract cannot be

ascertained in advance with reasonable accuracy.

The contractor receives his total cost plus a profit,

which may be a percentage of cost.

These types of contracts give protection to the

contractor against fluctuations in profits.

E.g. Production of a newly designed aircraft

component, Urgent repair of ships.

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Target Price Contracts

The contractor receives an agreed sum of profit over

his predetermined costs.

In addition, a figure is agreed as the target figure and

if actual costs are below this target, the contractor is eligible for bonus for the savings.

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Escalation Clause
To protect the contractor from the rise in the price.
The contract price is increased proportionately if

there is a rise in input costs.

The contractor will have to produce a proof

regarding the rise in the price.

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