Financial Accounting for Construction Contracts

July 22 , 2009 Posted by Vaccountancy In: Financial Accounting

A contract is a job that requires a period of time and that include activities to be done outside the factory promises, ie. construction of a dam or school buildings, fixing the lines, etc. special accounting and financial management is required to maintain records of construction contracts. Because each contract covers considerable resources both in terms of men and material, you must develop a system of accounting to determine the cost and the profit made on each contract separately.

Outcome of incomplete contracts: At the end of an accounting period in May, it was found that some contracts have been completed while others are still ongoing and will be completed in the coming years. The total profit on the contract term, regardless of profits and losses. But the same can not be done in case of incomplete contracts. These contracts are still ongoing, and there are opportunities for profits are converted into heavy losses due to rising prices of materials and labor and losses due to other unforeseen events. At the same time, it appears not as a desire to revise the profits on contracts and to ignore completely incomplete, because in May of this large fluctuations in the rate of profit each year. A year where a large number of contracts have been completed show an abnormally high figure for profits, while the reserves in May to be the case for the year in which many contracts are still incomplete. Therefore, the profits on incomplete contracts are to be considered, of course, having provided sufficient funds to meet unknown contingencies.

There are no rules for the calculation of earnings figures to be taken for credit and profit and loss account. However, in May the following rules to follow:

(a) The benefit must be considered to work only certificate, certificate of employment must be valued at cost.

(b) No profits should be taken into account if the amount of work certified is less than 1 / 4 of the contract price, because in this case, it is not possible to foresee the future clearly.

(c) If the amount of work certified is 1 / 4 or more but less than1 / 2 the price of the contract, 1 / 3 of the profits disclosed, but the reduction in the percentage of money received by the contract, should be taken to the profit and loss account. The balance must be allowed to remain in reserve.

(d) If the amount of work certified is very near the end, if possible, the total cost of execution of the contract is the total estimated profit on the contract can be calculated by deducting the estimated total cost of the contract price. The profit and loss account should be credited with a percentage of the total benefits estimated on the basis of payments, whose operations are certified for the total contract price.

(f) The entire loss, if any, should be transferred to the profit and loss account.

In addition, the costs of contracts in some contracts, CONTRACT agrees to pay the expenses of the contractor (in general, the first prize) of the work done on contract, plus an agreed percentage of it through the General and fresh profits. These contracts are known as cost-plus contracts. The contract cost plus the cost is used in cases where it is very difficult for the contractor quote the price of the contract, because there was no precedent from which it takes as a basis in May. E 'also used where the work to be done is not fixed at the time of placing an order for the contract. The method is usually used when the government is to have a contract. The method suffers from the following drawbacks:

There is no incentive for the contractor to remove waste and cost savings for the completion of the contract. On the other hand, has tried to raise prices because the cost is high, the greater its share of profit. With this system, the amount of overhead costs and profits of recovery depends on the value of materials used, which is subject to considerable price fluctuations. The fixed percentage agreed in May, therefore, to be too excessive or too low to cover overhead expenses and profit.

Escalation clause: a clause of climbing is generally included in the contract a guarantee against possible changes in the utilization rates of equipment and human resources. This clause provides that in case of articles of raw materials, labor, etc. specified in the contract, change during the execution of the contract, beyond a threshold price applicable at the time of signing the agreement, the contract price will be adjusted appropriately. The duration of the contract to clarify the procedure for calculating this adjustment in order to avoid future conflicts. Thus, for example a measure of safeguarding the interests of the contractor and the contract in case of fluctuations in the price of materials and labor, etc.

Work in progress: At the end of May of a contract still in progress. The duration of the works referred to work done in respect of the contract, which is still incomplete. These are:

(1) Working Certified: This refers to the work approved by the infection. In the case of contracts, it is impractical for the contractor to get the work approved from time to time with the infection. This is useful for the contractor in two ways, firstly if the work is not up to specific contracts, in May, asked the contractor to take corrective measures in time. Secondly, the contract is, in practice, it is useful to have a payment system, i. e. , CONTRACTS agrees to pay a certain percentage of certificates of employment (for example, 80 or 90 percent). This is beneficial to the farmer, because it's immediate liquidity.

(2) The certificate of employment: Refers to the work done by the contractor but not yet approved by the infection.

Work certified as usually some element of profit, while non-certified value is always a cost to the contractor.

Contract: The contractor may delegate the work to be done under contract to a subcontractor. Usually, a specialist in nature, i. e. , Steel, floors, etc., is done by subcontractors, who are responsible for the main contractor. The cost of these contracts for subcontracting is a charge against the contract for which the work was done.

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