• Contract costing also called terminal costing is a costing method, which is applied in the business engaged in

constructional and repairs works. It is a form of specific order costing where the work is undertaken as per
customers specific order which is generally of long duration as compared to job costing.

• Contract costing is applied in the construction of a building, plants, bridges, roads, dams, ships, engineering
projects, production of motion pictures etc.

• Distinguishing features of contract costing

• Major part of work is done on sites

• Duration of the contract is a relatively longer period

• Higher proportion of direct costs

• Lower indirect costs such as head office expenses, stores and works

• A separate account is maintained for each contract

• Contract is the cost unit in contract costing

• Recording of costs

• Materials purchased for contract or supplied from the store are debited in the concerned contract

account. Materials returned to stores or amount received from the sale of surplus materials will be
credited to contract account. If materials received from another contract, it will appear on the debit side
whereas transferred from another contract will appear on the credit side. Materials stolen or destroyed
will be transferred to profit and loss account.

• Labours employed at site are treated as a direct cost and charged to the concerned account, salaries to

staffs for a specific contract are also charged to concerned contract account. A separate wages sheet
may be prepared for each contract.

• Site expenses are charged to concerned contract account when they incurred.
• The full value of plants and machinery will appear on the debit side and credited with the depreciated

value at the end or a contract account should be debited with the value of depreciation of plant and
machinery.

• Overhead expenses are few in contracts and should be distributed over several contracts on a suitable

basis such as percentage of the cost of materials or wages or prime cost or labour hour in case of a big
contract.

• In case of Sub-contracts such as the installation of a lift, electrical works, etc. will be charged to

concerned contract account.

• If the Extra work is substantial it should be treated as a separate contract, else the cost of extra work

should appear on the debit side of the contract account as ‘cost of extra work’.
• Specific terminology in contract costing

• It is normal practice in case of a large contract that contractor will be paid during the contract based on work

completed and duly certified. The Certificate of work done refers to the certificate by surveyors or architects
appointed by contractee certifying the value of work completed. Work uncertified refers to the work which
has been carried out by the contractor but not certified by the surveyors.

• In case of a large contract, the contractor cannot afford to block fund until the completion, a part of the

contract price is paid on time to time, based on the certificate of work done is known as Progress payment.

• The term of the contract may provide that, the entire amounts as per the certificate of work done, will not be

paid to the contractor, a small portion will be held back by the contractee is called Retention money. This
money retained as a safety measure in case the contractor is not able to fulfil one or more of the conditions
laid down in the contract.
• Types of the contract

• Fixed price contract, where both parties agree to a fixed price contract

• Escalation clause provides the safeguard against any likely changes in the price of materials or labour; if the

prices go beyond the specified limit, the contract’s price will be suitably adjusted. A contract with such a clause is
known as Fixed price contract with an escalation clause.

• Cost plus contract refers to the contract; where no fixed price could be settled, and the value of the contract is

determined by adding an agreed percentage of profit to the total cost.

• Work in progress

The value of the work-in-progress includes of the cost of work completed, both certified and uncertified, it appears
in the contract account and shown as a current asset in the balance sheet under the headings of work-in-progress.
 Job costing
In job costing, a job is small in size.
Each job is a cost unit.
Job work carried in the company’s workshop or customer
premises.
A job usually takes less time for completion.
The Selling price of the job is paid in full after completion Price is paid in instalments, depending upon the progress
of the job.
In job costing expenses may be direct and indirect.
Profit or loss from a job entirely transferred to profit and
loss account.
The number of jobs in hand at any time may be large.
Contract costing
In contract costing, the contract is the larger in value.
Each contract is a cost unit.
Work carried at the site.
A contract takes more time for completion.
of work.
Most of the expenses are direct in nature.
Proportionate profit transferred to profit and loss account.
Only a few contracts may be undertaken at a time.
• The entire cost of the contract can be ascertained when it is completed but a contract may take more

than a year to complete. Profits on the incomplete contract should be considered as follows,
• The contract, which has just started i.e. the completion stage of contract is less than 25% of the total contract

price, no profit shall be transferred to profit and loss account.

• If the completion of the contract is 25% or more but less than 50% of the total contract. The profit shall be

transferred to profit and loss account as below

Cash received
Profit = x Notional Profit x
Work certified
where notional profit = value of work certified - cost of work certified

Cash received = value of work certified – retention money

• If the completion of the contract is 50% or more but less than 90% of the total contract. The profit shall be

transferred to profit and loss account as below

Cash received
Profit = x Notional Profit x
Work certified
• The contract nearing completion, i.e. the completion of the contract is 90%, and more, profit to be taken to

profit and loss account is calculated by determining estimated profit

work certified
Profit = Estimated profit x or
contract price

work certified Cash received

Profit = Estimated profit x x
contract price Work certified

• Whole of loss if any should be transferred to profit and loss account