This document discusses key concepts in contract costing such as: 1. A contract is an agreement between a contractor and contractee for construction work at an agreed price. 2. Contract costing tracks costs on each contract to determine profit or loss at completion. It uses a contract account for each job. 3. Incomplete contracts require estimating remaining costs to calculate interim profit using formulas based on work certified and cash received.

1. CONTRACT COSTING
Mahesh Chandra Sharma
Associate Professor, Department of Commerce
Shaheed Bhagat Singh Evening College
(University of Delhi)
Delhi (India)

2. Contract
■ A contract is usually assigned by a contractee to a contractor
to construct a building, Road, bridge, plant etc. for an agreed
amount which is called contract price.
■ Contractor: A person or a firm which has been awarded a contract for
construction of a building/plant etc.
■ Contractee: A contractee is a party who has given a contract to a
contractor to complete a big job.
■ Contract Price: The price agreed to be paid by a contractee to a
contractor as a consideration for completion of a job.

3. Payment of Contract Price
■ Lumpsum payment: Full payment of contract price is made in
lumpsum either at the beginning or on completion of the contract as
per terms.
■ Progressive payment: It is made in instalments as a fixed percentage
of the value of work certified by the architect/engineer/surveyor of
the contractee. Certification is done at regular intervals. For example
80% of the work certified.

4. Contract Costing and Job Costing
■ Contract costing : Contract costing is a special form of job
costing. The main difference between a job and a contract are:
1. Size: Contract is a big job.
2. More time period is required to complete a contract than a
job.
3. Activities are performed within the factory area in a job
while the same are performed outside factory area in case
of a contract.
4. Contract costing is used by building contractors, ship
builders and others to ascertain cost of a contract and find
profit earned or loss incurred in a contract. Job Costing is
done by a manufacturing concern doing job work.

5. Contract Account
■ Contract account is a nominal account, prepared to calculate profit
or loss on a contract at the end of accounting year or on completion.
■ A separate contract account is prepared each contract in the books
of contractor in General Ledger or in the Contract Ledger (In case a
large number of contracts are undertaken by a contractor.)
■ Contract account is debited with all direct and indirect expenditure
incurred in relation to the contract.
■ Contract price is credited to the contract account on completion of
the contract.
■ The balance amount represents the profit earned or loss incurred on
the contract and is transferred to Profit and Loss A/c.

6. Contract Costing – Some Terms
■ Cost-plus Contract: Cost plus contract is a type of contract in which
the contractee agrees to pay to the contractor the cost price (usually
Prime cost) of the work done on the contract Plus an agreed
percentage thereof by way of overhead expenses and profit.
■ Sub-Contract: In certain cases the contractor may entrust some
portion of the work to a sub contractor. For example: electricity
fitting, wooden work, etc. Cost of sub contract is debited to the
Contract A/c

7. Contract Costing – Some Terms
■ Extras: In certain cases the contractee may require some additional
work to be done or alterations to be made in the work originally
agreed under the contract. These are called extras and the
contractee is required to pay for them.
■ If extra work is substantial, a separate account should be maintained
for the same.
■ If extra work is not substantial, the cost of such work may be debited
to the contract a/c and the price charged for the same be credited to
the contract a/c (Contractee’s A/c)

8. Contract Costing – Some Terms
■ Cost Escalation Clause: In certain cases there may be an escalation
clause in the contract. As per this clause, in case prices of items of
raw materials, labour etc. specified in the contract increase during
the execution of the contract, beyond a certain limit over the
prevailing prices at the time of signing agreement, the contract price
will be suitable adjusted as per terms.
■ This amount is credited to the contract A/c (By Contractee’s A/c –
Cost Escalation).
■ Penalty: If a penalty is charged by the contractee from the contractor
for defective work or delay in the execution, the amount may be
deducted from the contract price.

9. Work-in-Progress
If the contract is incomplete, then the value of work done on the
contract on a particular date is called ‘work-in-progress’. It includes:
a) Work certified: It is the value of work so far done and approved by
the contractee’s architect/surveyor or engineer who issues a
certificate stating the value of the work done so far.
b) Work uncertified: Work done after the date of certification up to the
last day of the accounting year but not certified or approved by the
contractee’s architect or serveyor is called as ‘work uncertified’. It is
usually valued on the basis of prime cost or works cost.

10. Treatment of Materials and Plant
Dr Contract Account Cr.
Particulars Amt. Particulars Amt.
Materials issued from store
Materials purchased
Materials transferred from other
site
Materials returned to store
Materials sold (at cost)
Materials transferred to other site
Materials lost/destroyed (at cost)
Materials at site
Plant issued from store
Plant purchased
Plant transferred from other site
Hire charges of plant
Plant returned to store (Cost – Dep.)
Plant sold(Cost – Dep.)
Plant tfd. to other site (Cost – Dep.)
Plant lost/destroyed (Cost – Dep.)
Plant at site (Cost – Dep.)

11. Treatment of Labour /Expenses/Overheads and
Contract Price
Dr Contract Account Cr.
Particulars Amt. Particulars Amt.
Labour Paid + Outstanding
Expenses Paid + Outstanding
Overheads Paid + Outstanding
Contractee’s A/c (Contract Price)
Profit & Loss A/c (Profit) Profit & Loss A/c (Loss)
Note: Balancing figure of the Contract account will be profit or loss.

12. Incomplete Contract
Dr Contract Account Cr.
Particulars Amt. Particulars Amt.
Profit c/d (Estimated Profit or Notional
Profit )
Work-in-Progress:
(a) Work Certified
(b) Work Uncertified
Profit & Loss A/c (Profit transferred)*
Work-in-Progress A/c (Reserve)
Profit b/d
XXX XXX

13. Incomplete Contract (calculation of Profit & Reserve)
■ If there is a loss, then the whole amount of loss
(irrespective of work certified) shall be transferred to
Costing P & L A/c.
■ If work certified is less than 1/4th of the Contract Price –
No profit shall be transferred to the P & L A/c

14. Incomplete Contract (calculation of Profit & Reserve)
■ If work certified is 1/4th or more but less than ½ of the
Contract Price, 1/3 of the total estimated profit as reduced
by the percentage of cash received shall be transferred to
the P & L A/c
*Profit = Total Estimated Profit×
1
3
×
𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
■ If work certified is ½ or more of the Contract Price, 2/3 of
the total estimated profit as reduced by the percentage of
cash received shall be transferred to the P & L A/c
*Profit = Total Estimated Profit×
2
3
×
𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

15. If Contract is near Completion
(Calculation of Profit & Reserve)
■ On the basis of Notional Profit (as disclosed by the Contract A/c)
a) Profit to be transferred to P & L A/c = Notional Profit ×
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
b) Profit to be transferred to P & L A/c = Notional Profit ×
2
3
×
𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

16. If Contract is near Completion
(Calculation of Profit & Reserve)
■ If Contract is near Completion, then first find the total estimated cost =
Cost incurred + estimated cost to be incurred to complete the contract.
■ Then find Estimated Profit = Contract Price – Total Estimated Cost On the
basis of Total Estimated Profit (Contract Price – Total Estimated Cost)
a) Profit to be tfd to P & L A/c = Estimated Profit ×
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
b) Profit to be tfd to P & L A/c = Estimated Profit×
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
×
𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑