What is a Contract?
A contract is an agreement between two or more parties. The business owner can hire the service or product from the different suppliers.
It is a document or the contract that defines the terms and conditions of the agreement.
What is Contract Costing
Contract costing is the process of estimating what the cost of a contract will be to the company. It is a process that allows the company’s management to prepare a budget and forecast their spending throughout the contract. Contract costing is a useful tool that can help you budget, plan and manage costs, and help you negotiate a contract with the subcontractors or suppliers.
Contract costing, also known as terminal costing, is a costing technique similar to job costing and is used by businesses such as builders and public works contractors that perform work on a contract basis.
Characteristics of contract costing
The following are the unique characteristics of contract costing:
- Over the course of a year, the contractor begins work on a huge number of major projects.
- Contracts are executed at a location other than the contractor’s.
- Contracts may be extended beyond a single accounting period.
- Materials are acquired and delivered directly to the contract site from the central MITS or are supplied from the central MITS.
- Payroll is prepared on-site or centrally at an administrative office.
- Subcontractors, such as ventilation engineers, elevator makers, and flooring specialists, may be hired.
- Plant and equipment may be acquired or rented from another firm or a central plant department for the term of the contract.
- Payment by the customer for various stages of the contract is made only upon receipt of the completed stage’s architect’s certificate. The client withholds a portion of the payment referred to as retention money until a specified amount of time specified in the original contract has elapsed.
- Typically, the contract price is determined in advance of the task. Additional work that is determined to be necessary may be billed on a cost-plus basis. Additionally, terms may be Unsorted to let the contractor to pass on to the client any higher expenses incurred as a consequence of increased material, labour, or other expenditures.