Contract Costing:

Contract: A contract is nothing but a big job having following

features:

1. A high price of thousands or lakhs of rupees.

2. The period taken for completion may be many months or even
years.
3. The actual work may be done at a site away from the main office
of the contractor.

Contract Costing:

Contract costing is the method of costing used to

find out the cost and profit of each contract for a given period.
Contract costing which applies where the work is undertaken to
customer’s special requirement and order which is of a longer duration
and which is carried out at site which is different from contractor’s
premises. Contract costing enables the contractor to ascertain and
control the cost of each job or contract.

Contract costing is applicable when the work is usually of

constructional nature for e.g. construction of road, building, dams,
erection of factories, bridges, and other civil engineering works, the
technique of contract costing is preferable.

Meaning of some important terms under contract costing.

1. Contractor: Contractor is the person who undertakes the

contract (job).

2. Contractee: Contractee is the person for whom contract job is

undertaken.

3. Contract price: Contract price is the amount agreed to be paid

by the contractee to the contractor as consideration for the job
done. The contract price may be payable in lumpsum when work
is completed. Alternatively, the amount may be paid in
installments as the work progresses. The amount of each
installment would depend on the amount of work done and
certified by the architects.
4. Work Certified: In the case of large contract, normally the
contractor receives on account payment against the value of the
work completed at specific intervals. Work certified is that part
of work completed for which the contractor gets the certificate of
the architect. In the case of large contract, the contractor would
expect the contractee to make a payments of the contract price
in installments. He therefore, sends a part bill to the contractee
as and when a portion of the work is completed. An architech,
appoint in terms of the contract, between the contractor and
contractee, scrutinizes the part bill, he certifies the work done
for the purpose of payment. The work certified is related to the
contract price and not to the cost of the work done. Suppose the
contract price is Rs. 10 lacs, and the cost incurred to date by the
contractor is Rs. 4 lacs. If half the work is done and certified,
then the value of work certified will be half of Rs. 10 lacs, i.e. Rs.
5 lacs. The value will have nothing to do with cost-to-date of the
work done.
Therefore. Work Certified = Cost of Work Certified + Profit

5. Work Uncertified: Work uncertified is that cost of work done

which relates to the period between the date of work certified
and accounting year ending. At the end of the accounting period,
not all work done would have been certified by the architect.
This would be so because the bill itself would not have been
submitted by the contractor. Suppose the accounting period
ends on 31st December. The contractore would have submitted
his bills which would probably include all expenses incurred by
him upto 10th December and this might be certified for the
payment by the architech. The expences incurred by the
contractor between 11th December and 31st December is the cost
of work uncertified, This amount is always with reference to its
cost and not at contract price as compared to the work certified
which is at selling price.

6. Retention Money: Retention money is that part of work

certified which is retained by the contractee so as to safeguard
his interest in case of future defects in the work done. The
contractee does not pay full amount of the value of work
certified.He keeps certain amount till contract is complete. This
amount so kept is by contractee is called retention money.
How to find profits from incomplete contract:

Performa of Contract Account

Contract A/c For the year ended ……………………..

Particulars Rs. Particulars Rs.
To Material Bought XX By Materials Lost (Cost) XX
To Materials Issued From XX By Materials returned to XX
Stores XX stores XX
Material transfer to other XX By Materials Transf. to
contract XX other contract XX
To Labour XX By Closing stock of
To Direct Expenses XX material
To Indirect Expenses XX XX
To Depri. on Plant used By Work-in-progress XX
To Notional Profit Work Certified
Work Unceritfied
XX XX
XX
To Profit & loss A/C By Notional Profit
To Reserve For
Contingency

Question: How to determine the amount to be transferred to

profit & loss account?

Ans. 1) Find out the % of work completed

2) Find out the amount of profit to be transferred to profit & loss
. account.

1) Find the extent of work certified:

The value of work certified is to compared with the total contract

price to ascertain . the % of the work completed.

Thus, % of work Certified = Amount of work certified X 100

Total contract price
The standard rules for transferring the amount of such profit to P & L
A/c in relation to the extent of work completed.

Extent or Work Completed: Profit to be Considered:

0 to 24 % N o profit is transferred to P&L a/c

25 % or more but less than 49 % 1/3rd of notional profit transferred
to P&L a/c & remaining in reserves
50 % or more 2/3rd of notional profit is
transferred to P&L a/c & remaining
in reserves.
100 % i.e. when entire contract is There is no need to keep ant
complete. reserve and the entire profit may
be credited to the P&L A/c

Note: In any case, whenever there is a loss. It should be entirely

debited to the profit and loss account irrespective of the stage of
completion. This is in accordance with the basic convention of
conservation followed by accountants.

2) Find amount of profit to be transferred to profit & loss account

based on % of completion of work:

Profit to be transferred to P&L A/c= Notional Profit X 1 or 2 X Cash Received

3 3 Work Certified