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Unit 11: Contract Costing

Notes

Did u know? All wages of workers engaged on a particular contract are charged direct to
the contract account.
(iii) Direct Expenses: The expenses incurred exclusively for a particular contract are treated as
direct expenses and are chargeable to that contract for which incurred. For example, a plant
hired for a special contract will be charged by the hire charges or fees paid to expert for
consulting him as regard to a specific contract would be treated as direct expense.
(iv) Indirect Expenses: When a contractor undertakes more than one contract simultaneously,
he will set up a common office and engages common supervisory staff. The administration
expenses incurred and the supervisor’s salary is apportioned among the contracts on some
suitable basis.

(v) Plant and Machinery: Some of the assets that are to be depreciated while on use on a contract
are bulldozers, cement mixer, mobile crane, tractors, lorries and tiles-polishing machines.
There are two ways of dealing with the plant and machineries used on a contract.
™ z Where a plant or machinery is specially purchased for a particular contract to be
used for longer duration, the contract account is debited with the value of plant. At
the end of the accounting period, the depreciated value of the plant or machinery is
credited to the contract account.

™ z When the plant or machinery is used relatively for a shorter duration on a contract,
the contract account is charged with the depreciation of the plant or machinery.
(vi) Sub-contract Cost: Work of specialised character, for which facilities are not internally
available, is offered to a sub-contractor.
For example, steel work, glass work, electric fittings, doors and furniture fittings, painting,
etc., are usually carried out by the sub-contractors who are accountable to the main
contractor. The cost of such work is charged to the contract account.
(vii) Cost of Extra Work: Sometimes the contractor is required to do some extra work like
additions or alterations in the work originally done as per contract or agreement. The
contractor will charge extra money for such extra work. The cost of such extra work or
job is debited to the contract account and extra price realised is credited to the contract
account.
(viii) Retention Money: Usually the contractee stipulates in the contract deed that he would
withhold a part of the contract price to be paid at a later stage after completion of the
contract. This is to make sure that the contractor has performed all work relating to contract
on the most satisfactory manner and that no repair work arises within a prescribed time
limit. The amount so withheld by the contractee is known as retention money. It safeguards
the interest of the contractee against the contractor, who may at time perform sub-standard
work and gain there from.
(ix) Cost of Maintenance Periods: Sometimes contractors are required to maintain the work
during a specified period after completion, the cost of maintenance is also debited to the
contract account.
(x) Progress Payment: In large contract, which takes longer duration to complete, the contractee
pays to the contractor a certain amount from time depending upon the stage of satisfactory
completion of work. The progress of work from time to time will be certified by the architect
or civil engineer of the contractee. Thus, every installment of money paid by the contractee
to the contractor depending upon the progress of work is known as progress payment.
(xi) Escalation Clause: This clause is often provided in contracts to cover any likely changes
in the price of materials, labour etc. Thus, a contractor is entitled to suitable enhance the

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