Contract costing is the method of specific order costing and it is used where work is undertaken according to customer’s special requirements and each order is subject to long term basis. It is a special type of job costing where the unit of cost is treated as a single contract basis. Contract itself is considered as the cost centre and it is executed according to the specifications of a customer. Contract Costing is mostly used by engineering industry where long term projects are undertaken for example, construction of road, bridge, and building. Contract costing is similar to job costing.
Important Key Terms used in Contract Costing
The following key terms are generally used in contract costing.
- Contract: A contract is a legally enforceable agreement between two parties for example, contractor and contractee which contains the terms and conditions in relation to a specific job.
- Contractor: The person who undertakes to do the job is a contractor and contractor may also be a third person.
- Contractee: The person for whom the job is being done is the Contractee and contractee may be an individual or an organization.
- Contract Price: Contract price is the amount agreed to be paid by the contractee as consideration for the job to be done by the contractor.
- Work certified: It is the portion of work done by the contractor and certified by the technical assessor and architect appointed by the contractee according to terms and conditions of the contract.
- Work uncertified: It is the value of work completed by the contractor but not certified by the technical assessor and architect at the end of the accounting period.
- Retention Money: It is the amount relating to the portion of work certified and retained by the contractee as a security deposit in consequence of any loss that may arise due to defects in the completed work noticed in future periods.