Contract Costing

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Contract costing does not differ in principle from job costing, it is convenient to treat contract cost accounts separately. The term is usually applied to the costing method adopted where large scale contracts at different sites are carried out, as in the case of building construction.

Contract is a specific order received from the contractee and every contract is customized as per the contractee’s requirement and the work is carried on site itself. 

Escalation clause
Escalation clause is usually provided in the contract as a safeguard against any likely changes in the price or utilization of material and/labor. This clause provides that in case prices of items of raw materials, labor etc. specified in the contract change during the execution of the contract, more than a specified limit over the prices prevailing at the time of signing the agreement, the contract price will be accordingly adjusted. The terms of the agreement specify the procedure for calculating such adjustment in order to avoid any future disputes. So this clause safeguards the interest of both the contractor and the contractee in case of fluctuations in the prices of material, labour etc

Cost plus contract
Cost plus contract is a kind contract in which the value of the contract is ascertained by adding a certain percentage of profit over the total cost of the work. Cost plus contract is used in case of those contracts whose exact cost cannot be correctly estimated at the time of undertaking a work. The profit to be paid to the contractor may be a fixed amount or it may be a particular percentage of cost or capital employed. This type of contracts are undertaken for production of special articles not usually manufactured and is generally employed, when Government happens to be a contractee. 

When a contractor is working on a contract for several years, he cannot block a large amount of funds till the completion of the contract. So, in case of large contracts the system of progress payment is adopted. Contractee agrees to pay a part of the contract price from time to time depending upon satisfactory progress of the work. The progress will be judged by the contractee's architect who issues a certificate stating the value of work so far done and approved by him. This is termed as work certified. The contractor is paid 75% or 80% of the work certified depending upon the terms of the contract. The object of retention is to place the contractee in a favorable position in case the contractor does not fulfil some of the conditions laid down by the contract or in case of faulty work

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