What is Contract Costing?

Contract is an agreement enforceable by law. It is an agreement between two parties – Contractor and the Contractee. The contractor agrees to undertake and complete the work, as per terms of contract, within a specific period and for a particular monetary consideration. The terms of contract regarding work to be undertaken, period in which to be completed, value of the contract advances to be made by the Contractee to the contractor on the certificate of architect, compensation payable by the contractor for the breach of contract, etc., are decided upon between the two parties before the work is started. These contracts related to the works of construction of roads, buildings, bridges, dams and banks, ports, etc,

Contract costing is the technique of ascertaining cost of a contract. Here the unit of cost is one only, e.g., a building, or a bridge etc. it is similar to job in principle, and so the method of recording cost is the same. A Contract Ledger book is kept in which a separate account for each contract is opened.

The following items appear on the debit side of the Contract A/c:

1. Direct Materials
2. Direct Labour
3. Direct Expenses
4. Overheads
5. Plant and Machinery
6. Sub-Contract Cost
7. Extra Work done

The following items appear on the credit side of the Contract A/c:

1. Materials Returned
2. Materials Transferred
3. Materials at the end
4. Plant and Tools at the end
5. Work Certified
6. Work done but Uncertified
7. Contract Price