IPCC Contract Costing Notes Nov 2015 Costing Important Notes

Notes on Sub-Contract Costing: When a contract either completely or partly given to another contractor by the principal contractor (to whom contractee has entered into an agreement) to get the work completed is known as sub-contracting and work given is known as sub-contract work.

Notes on Work Certified Costing: The portion of work which is certified as complete by architecture, surveyor, engineer or any other person as may be agreed between the contractor and contractee is called work certified. 

Notes on Progress Payment Costing: Contractors receive payments from the contractees periodically for the work done on the contract. This is known as progress payment or running payment. This is paid on the basis of certificate of work completion issued by the architect.

Notes on Retention Money Costing:Retention money is a part of the value of work certified which though certified but is not paid by the contractee. Retention amount is kept by the contractee as security amount against any damage.

Notes on Cost plus contract Costing:Under Cost plus contract costing, the contract price is ascertained by adding a percentage of profit to the total cost of the work. Such type of contracts are entered into when it is not possible to estimate the contract cost with reasonable accuracy due to unstable condition of material, labour services, etc.

Notes on Escalation Clause Costing: Escalation clause is a clause written in the agreement (contract) between the contractor and contractee which states that in case of increase in the prices of materials, wages or other supplies beyond a certain level the contract price will be increased by an agreed amount.

Notes on Profits on incomplete contracts Costing: Profits on incomplete contracts are recognised on prudent basis. The overriding principle being that there can be no attributable profit until the outcome of a contract can reasonably be foreseen.

Contract Costing Exam Summary for quick revision:

Notes on Main features of Cost-Plus-Contracts in costing:

1. This method is adopted in the case of those contracts where the probable cost of the contract can not be ascertained in advance with a reasonable accuracy.

2. These contracts are preferred when the cost of material and labour is not steady and the contract completion may take number of years.

3. The different costs to be included in the execution of the contract are mutually agreed, so that no dispute may arise in future in this respect. Under such type of contracts contractee is allowed to check or utilization the concerned books, documents and accounts.

4. Such a contract offers a fair price to the contractee & also a reasonable profit to the contractor.

5. The contract price here is ascertained by adding a fixed and mutually pre-decided component of profit to the total cost of the work.

Notes on Escalation Clause:

This clause is usually provided in the contract as a safeguard against any like changes in the price or utilization of material and labour. If during the period of execution of a contract, the price of materials or labour rise beyond a certain limit, the contract price will be increased by an agreed amount. Inclusion of such a term in a contract deed is known as an ‘escalation clause’.

An escalation clause usually relates to change in price of inputs, it may also be extended to increased consumption or utilization of quantities of materials, labour etc. In such a situation the contractor has to satisfy the contract that the increased utilization is not due to his inefficiency

Notes on Basic Formula in Contract Costing:

1. When work on contract has not reasonably advanced, no profit is taken into account. In practice, no profit is calculated when work certified is less than 1/4th but less than ½ of the contract price.

2. When work certified is more than 1/4th but less than ½ of the contract price, following formula is used to determine the figures of profit to be credited to profit and loss account:

[1/3 × Notional profit × Work certified/Cash recieved]

3. When work certified is more than ½ of the contract price, but it is still not in the final stage, following formula is used to determine the figure of profit to be credited to profit and loss account:

[2/3 × Notional profit × Work certified/Cash recieved]

4. When the contract is almost complete, an estimate total profit is determined by deducting aggregate of cost to date and estimated additional expenditure from contract price. A portion of this estimated total profit is credited to profit and loss account. The figure to be credited to profit and loss account is ascertained by adopting any of the following formulae:

[Estimated total profit × Contract price/Work certified]

[Estimated total profit × Contract price/Cash received]

[Estimated total profit × Estimated total cost/Cost of Work to date]