CONTRACT COSTING

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Contract Costing defined:
Method where each contract is
treated as cost
unit and Profit & Loss is ascertained
Employed by undertakings engaged
separately.
in building,
road & bridge construction, ship
building, etc.

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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
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be
 Plant may be purchased or hired especially
for the
contract
Employed by undertakings engaged in
building, road & bridge construction, ship
building, etc. out at site and not in factory
Work carried
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:
Contract
or: who undertakes the task of doing the job
Person
Contracte
e:
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 7
 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% Profit X 1/3 X Cash received
Notional
--------------------
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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