What is Contract Costing?
Contract costing, sometimes called terminal costing, is the amount that a contracted job will cost to perform. This type of contract is used by businesses who do some type of construction as part of the services they offer, as those types of jobs are almost always done on a per contract basis. This can include any type of construction including ship building, airplane building, road construction, and dam construction. The term typically applies to longer term contracts.
When a company takes on a contract there are many factors to consider. First, the job will be based on a contract with another company or possibly a government institution. For accounting purposes, the costs required will be calculated per contract as opposed to an overall accounting done yearly. This allows the contracting company to give the contractee, the company or government purchasing the contract, an estimate of their cost. It also gives the company doing the contract an easier way to calculate profits and costs.
When a contract cost is calculated, there are several key aspects of the job that will be factored in. The most straightforward cost is the cost of labor. Another key factor is the cost of material. This is a little harder to calculate, as sometimes materials can be used from another contract, or there may be excess from the current contract.
Other factors are typically included as direct costs. The cost of equipment rental or having an office on the building site are typical examples. Other costs, such as the price of hiring a sub-contractor or doing extra work, will also be included.
There are generally two types of contract costing. The most common is fixed price contract costing. This is used when planning out a contract, and is the standard type of contract. The other type is known as a cost plus contract. Sometimes called a lime and line contract, it is used when there is an urgent need, such as the repair of an aircraft or ship or when creating a new product or part, and these a more common in the building of planes and ships.
The costs for fixed price contract costing is calculated and then typically approved by an architect or engineer. It is then submitted for approval to both parties involved. Once approved, an account journal will be kept by the contractor to keep track of costs and profit on a real time basis as opposed to calculating it yearly or quarterly, which can be cumbersome. A cost plus contract will include the costs of the project plus an additional fee, usually calculated as a percentage of the overall costs, because of the specialized nature of the contract.
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