Contract costing is a method of accounting that is commonly used in industries such as construction, engineering, and manufacturing. It involves the calculation of costs associated with a specific contract and the subsequent invoicing of the client. In contract costing, the type of contract is an essential factor in determining the costs and revenue to be accounted for in the contract. This article will explore the different types of contracts in contract costing.
1. Fixed Price Contract
A fixed price contract is the most common type of contract in contract costing. It is also known as a lump-sum contract, and it involves a fixed price that is agreed upon by both parties before the project begins. The contractor will calculate all the costs associated with the project and add a profit margin to determine the fixed price. The client will pay the amount agreed upon, irrespective of any changes in the project.
2. Cost Plus Contracts
Cost plus contracts are another type of contract in contract costing. In this type of contract, the contractor covers all the costs associated with the project and adds a percentage of profit to the total cost. The client will pay for the actual cost incurred during the project, as well as the added profit margin.
3. Time and Material Contracts
In a time and material contract, the contractor will charge for the time spent on the project and the material used. This type of contract is often used in projects where the scope of work cannot be determined accurately before the project begins. The client will pay for the number of hours worked, the rate per hour, and the cost of material used.
4. Unit Price Contracts
Unit price contracts involve the charging of a fixed price per unit. This type of contract is often used for projects that involve the production of identical units. For example, a construction project may require the production of a specific number of bricks, and a unit price contract will be used to determine the cost per brick.
5. Incentive Contracts
Incentive contracts are used to motivate contractors to complete a project on time, within budget and with a high degree of quality. These contracts involve the setting of targets and rewards for the contractor based on achieving these targets. The incentive can be in the form of a bonus payment or equity in the project.
In conclusion, the type of contract used in contract costing is an important factor in determining the costs and revenue to be accounted for in the contract. It is important for both the contractor and the client to understand the type of contract being used and its implications on the project. A professional can help create articles on contract costing with clear explanations on the various types of contracts and their implications.