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CHAPTER – 09
Contract Costing
It is a method of costing followed by organisations taking up construction
contracts.
The relationship between the contractor and contractee is established in a
contract. The contract is taken up for a price known as Contract Price.
A clause in a contract provides for escalation or revision of contract price in the
event of increase in cost of materials or labour required for execution of contract. Such
clause is known as escalation clause.
A contractor can take up multiple contracts in a period. One contract can extend
to multiple periods.
During the course of execution of contract, part payments for completion of work
is collected from contractee.
Such part payment will be based on work certified. The cost of work completed
and certified is known as work certified. The cost of work completed but not certified is
known as work uncertified.
The amount of escalation, if any, will be added to work certified and contract
price.
While preparing a contract account, profit on the contract is treated as notional
profit. Only a portion of profit is transferred to P&L account and rest kept in reserve.
The portion of profit transferred to P&L account is based on degree of
completion of contract.
