Financial Accounting

Introduction to Contract Costing – Explanation

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:

  1. Over the course of a year, the contractor begins work on a huge number of major projects.
  2. Contracts are executed at a location other than the contractor’s.
  3. Contracts may be extended beyond a single accounting period.
  4. Materials are acquired and delivered directly to the contract site from the central MITS or are supplied from the central MITS.
  5. Payroll is prepared on-site or centrally at an administrative office.
  6. Subcontractors, such as ventilation engineers, elevator makers, and flooring specialists, may be hired.
  7. Plant and equipment may be acquired or rented from another firm or a central plant department for the term of the contract.
  8. 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.
  9. 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.

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