Contract Costing

Unit - 3
Contract Costing

Contract: Work done by a Contractor for mainly construction of

roads, bridges, buildings, etc.

A Contract entered into for the design, manufacture or

construction of a single substantial asset, where the time
taken to complete the contract falls into different accounting
periods.

Contract Costing: “That form of specific order costing, which

applies when work is undertaken to customer’s special
requirements and each order is of long term duration.”
Features of Contract Costing

Construction Activity – For a single substantial contract

Site-Work

Long Duration of Work and Difficulty in Profit Apportionment

Custom-Made Work

Contract-wise Cost Accumulation and Ascertainment

 Types of Contracts:

Fixed Price Contract with Escalation Clause

Cost Plus Contract

 Fixed Price Contract with
Escalation Clause
Care to be taken
while incorporating
Escalation Clause Escalation Clause:
provides the Frequency of
Contracts where an
formula for adjustment,
Escalation Clause is
calculating the This formula varies elements to which
built in to safeguard
amount of from contract to escalation will
the contractor
escalation i.e. the contract. apply, power to
against price
amount by which customer to audit
changes.
the contract price is cost increases,
to be changed. covers only rise or
both-rise and fall in
prices.
 Cost Plus Contract
The actual The ‘Plus’ should
allowable or be arrived at on
Used when price
defined costs the basis of
rises cannot be
incurred + An mutual
estimated on the
agreed upon agreement and
basis of current
percentage of must be
costs
these costs or a included in the
fixed fee contract.
 Incomplete Contracts and Profit

Profits for long term contracts should be ascertained on

prudent basis and credited to the profit & loss account for the
relevant period. This would lead to recognition of profit as the
work progresses.
Work Certified should form the basis of Profit Computation.

Work Certified:
Completed work that has been Work Uncertified:
inspected and approved by a
Work Completed, but for which
certified surveyor and a
Completion Certificate has not
certificate is issued by him
been issued.
showing the stage of
completion.
Profit Calculations for Incomplete Contracts
Status of Work Profit to be Transferred to P&L A/C

When value of Work Certified is <25% NIL

When Value of Work Certified is 1 x Notional Profit x Cash Received

>25% but <50% 3 Work Certified

When Value of Work Certified is 2 x Notional Profit x Cash Received

>50% but <90% 3 Work Certified

Estimated Profit x Cash Received

When work is near completion Contract Price

Value of Work Certified = Work Certified x 100

Contract Price
Example:
 Following Amounts are given:
 Work Certified – Rs. 60000
 Contract Price – Rs. 120000
 Notional Profit – Rs. 73800
 Cash Received – Rs. 50000

Calculate the Amount of Profit to be transferred to Profit & Loss A/C