CONTRACT COSTING

Outline

Definition
Characteristics of contract costing
Contract terminology
Construction In Process account
Contractee account
Statement of Financial Position
(extract)
Calculation of estimated profit
Fazrul Hanim@UiTM JOHOR

Definition
Contract costing :
Is a form of specific order costing, attribution
of costs to individual contracts. (CIMA
terminology)
Usually applies to major long term contracts
rather than short term jobs.

E.g: civil engineering contracts for building

houses, roads, bridges and so on.

Fazrul Hanim@UiTM JOHOR

Characteristics
Job to be carried out is large in value
Job takes a longer duration of time to complete,
normally more than one accounting period.
A contract account (Construction in Process Ac)
is maintained for each contract undertaken
Similar to job costing, except different in size,
undertaken to customer special requirement.
Site oriented, frequently construction work
Higher proportion of direct costs and low
overhead costs.
Fazrul Hanim@UiTM JOHOR

PARTIES INVOLVED IN CONTRACT

COSTING
CONTRACTOR

The party/person who produces

product required by customer

SUBCONTRACTOR

Do other supporting jobs

Fazrul Hanim@UiTM JOHOR

CONTRACTEE

The customer who orders job

to be done by contractor.

ARCHITECT

Certified and valued work done

by contractor

Contract terminology
terminology

definition

Progress billing @
Value of work certified

Value of work done to date comfirmed by the surveyor or

architect. They will state the sales value of the work which
has been completed to date.

Progress payment

Interim payment made by contractee as the contract

proceeds. Basis of payment is an architect certificate of
work satisfactorily completed.

Cost of work certified

It is the cost of sales where this cost is being confirmed by

architect or surveyor on the day when the value of work
certified is being confirmed

Cost of work
uncertified

Represent the unexpired cost of the current period and only

become expired on the next period

Fazrul Hanim@UiTM JOHOR

Contract terminology
terminology

definition

Contract Revenue /
price

Is the turnover or sales value of the contract. This will be

claimed by the contractor from the buyer. Contract revenue
may or may not be the same as the value of work certified.

Retention money

An amount of money withheld by contractee in order to

secure himself against any defect or incomplete work. The
retention money is normally paid when the contract is fully
completed.

Cost of work done to

date (COWDTD)

Cost incurred by a certain stage of work at a certain period

of time.

Estimated future cost

Budgeted cost that needs to be incurred in completing the

contract

Fazrul Hanim@UiTM JOHOR

Accounts and Statement

Construction In Process Account
Contractee Account
Statement of Financial Position (SOFP)
(Extract)
Determination of WIP (Work InProgress)

Fazrul Hanim@UiTM JOHOR

Construction In Process Account

Material issued from store
Material bought at site
Plant at (cost or NBV1)
Wages paid
Wages accrued c/d
Direct expenses
Sub-contractor charges
Head office charges
Expenses accrued c/d

XX
XX
XX
XX
XX
XX
XX
XX
XX

Material return to store

Material at site c/d
Material return to supplier
Plant at NBV2 (c/d)
Expenses prepaid
COWDTD c/d

XX
XX
XX
XX
XX
XX

COWDTD b/d
Attributable profits

XX
XX

Contract revenue

XX

Material at site b/d

Plant at book value (b/d)
Expenses prepaid b/d

XX
XX
XX

Wages accrued b/d

Expenses accrued b/d

XX
XX

Fazrul Hanim@UiTM JOHOR

Contractee account (Acc Receivable)

Progress billing @
Value of work certified

XX
XX

Cash/ bank
Bal c/d (retention money)

XX
XX
XX

Progress Billing account

Balance c/d

XX
XX

Contractee

XX
XX

Contractor will bill the customer from time to time according to an agreed
schedule.
When the contractee is billed, the Contractee Account (also knows as
Account Receivable) is debited & Progress Billing Account will be
credited.

Fazrul Hanim@UiTM JOHOR

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Attributable Profit
Calculation of profit attributed to each accounting
period.
2 methods:
Cost Basis

Surveys of work performed

Loss on contract
If a loss can be estimated to result when the
contract is completed, the whole amount of loss
must be taken into account in the period when the
loss is estimated.
Fazrul Hanim@UiTM JOHOR

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Work In Progress (WIP)

In order to prepare the balance sheet, we have to determine the value of

WIP.
WIP will be valued at the accumulated costs for each period until the
contract is completed.

RM
Cost of work done to date
XX
(+) attributable profit
XX
(-) Forseeable losses
XX
Costruction in progress b/d
A
(-) Progress payment received/ Value of Work certified
XX
WIP
B
Fazrul Hanim@UiTM JOHOR

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Work In Progress (WIP)

Figure (A): If (A) is negative, do not proceed to (B). The
amount obtained (negative A) should be shown in the SOFP
under liabilities as Provision for liabilities and charges. In
this case, there is no WIP in the Balance Sheet.

Figure (B): If (B) is negative, the amount should be shown in

the SOFP under liabilities as part of creditors. This amount
represents the excess of progress billing over WIP.
If (B) is positive, this value will be shown in the SOFP under
Current Assets as WIP.

Fazrul Hanim@UiTM JOHOR

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