Financial Accounting

Introduction to Contract Costing

What is a Contract?

The contract is the agreement between the 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, also known as terminal costing, is a costing technique that is similar to job costing and is used by businesses such as builders and public works contractors that perform work on a contract basis. 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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