Chapter 10:

LONG TERM CONSTRUCTION CONTRACTS

CONSTRUCTION CONTRACT
- Contract negotiated for the construction of an assets or combined assets which closely
interrelated in terms of design, technology and purpose of use.
-

Classified as:
o Fixed Price Contract contractor/entity agrees for fixed price
o Cost Plus Contract contractor/entity reimbursed allowable or otherwise defined costs

CONTRACT REVENUE (Income)

- Including:
o Initial amount of revenue agreed in the contract
o Incentive for early completion
-

Measured at FAIR VALUE

CONTRACT COST (Expense)

- Directly related to the specific contract
- Attributable to contract activity
- Can be allocated to the contract
- Charged to the customer under the terms of the contract
-

Examples:
o Construction materials used
o Construction labor cost
o Construction overhead
o Depreciation of PPE used
o Hiring PPE costs
o Cost of moving PPE from/to its designated site
o Design and technical assistance costs
o Expected cost for warranty/rectification/guaranteed work
o Claims from third parties
o insurance
o Admin and development cost stated on the terms of contract

Categories:
o Cost incurred to date (CID)
Pre contract costs
Incurred before contract has been entered into
Contract has expectation to be accepted
Recoverable through billings
Costs after acceptance
Incurred toward the completion of the project
Capitalized in the Construction in Progress account
o

Estimated cost to complete (ECC)

Materials used costs
Labor costs
Overhead costs
Subcontracting costs
Amount billed to the principal contractor/entity

COMPUTATION/RECOGNITION OF CONSTRUCTION REVENUE

1. Percentage of Completion Method
- Outcome of the contract can be estimated reliably
- ECC and progress of completion are dependable
1.1. Input measures or cost to cost method
Computation 1:
Contract Price
- Total Estimated Costs:
Costs Incurred to Date (CID)
Est Costs to Complete (ECC)
Expected Gross Profit
x
-

% of Completion: CID / Total Estimated Costs

Gross Profit - Earned to date
Gross Profit - Earned from Previous Year

xx
xx
xx

xx
xx
%
xx
xx

Gross Profit - Earned this Year

xx

Computation 2:
Contract Price
x % of Completion: CID / CID + ECC

xx

Value of Contract Earned

Costs Incurred to Date (CID)
Gross Profit - Earned to date
Gross Profit - Earned from Previous Year

xx
xx

Gross Profit - Earned this Year

xx

xx
xx

1.2. Output measures or units of delivery method

2. Zero Profit Method
- If contractor/entity follows Cost Plus Contract and unable to estimate the percentage of
completion, assured that no loss will be incurred and this method called Percentage of
Completion Method based on Zero Profit Margin, which revenue = costs incurred until estimate
percentage of completion becomes available.

Construction Revenue
Cost Incurred each Year

xx
xx

Gross Profit - Earned this Year

xx

Journal Entries for both method

Costs Incurred:
Construction in Progress
xx
Cash
**Same entry Percentage of completion**
Progress Billings
Accounts Receivable
xx
Contract Billings
** Same entry Percentage of completion**
Billing Collections
Cash

xx

xx

xx
Accounts Receivable
** Same entry Percentage of completion**

Revenue Recognition
Cost of Construction
Construction Revenue

xx

xx

Construction in Progress
xx
Cost of Construction
xx
Construction Revenue
**Percentage of completion**

xx

xx