Financial Accounting for the construction contract

July 6 , 2009 Posted by Vaccountancy In: Financial Accounting

A contract is a work requiring a considerable amount of time and includes the work to be done outside the factory promises, ie. construction of a dam or the construction of schools, the establishment of railway lines, etc special accounting and financial management is required to maintain records of construction contracts. As each contract will require significant resources both in terms of men and equipment, it is necessary to develop an accounting system to determine the cost and profit on each contract separately.

Result of incomplete contracts: At the end of an accounting period can be found that some contracts have been completed while others are still ongoing and will be completed in the coming years. The total profits of the completed contract to be taken for credit and the profit and loss account. But the same can not be done in the case of incomplete contracts. These contracts are still ongoing, and there are opportunities to turn losses into profits due to strong price increases for materials and labor and losses due to unforeseen circumstances. At the same time does not seem to take into account the profits for futures contracts and to completely ignore these incomplete because it results in May fluctuations in the rates of profits from one year to another. A year where a large number of contracts have been made show an abnormally high profits, while the reserve in May to be the case for the year in which a large number of contracts remain incomplete. Therefore, the benefit of incomplete contracts must be considered, of course, after providing a sufficient amount of meeting unknown contingencies.

There are no rules for the calculation of profit figures to take into the account of profits and losses. However, in May the following rules be followed:

(a) The benefits must be taken into account with respect to the work of certified, uncertified work should always be valued at cost.

(b) No benefits should be taken into account if the amount of work certified is less than 1 / 4 the price, because in these cases 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, such as reduced, but the percentage of money received from the CONTRACTED 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 close to the end, if possible, the total cost of performing the contract is estimated the total amount of profit on the contract may then be calculated by deducting the estimated total cost of the contract. The profit and loss account should be credited with the proportion of the total estimated profit on a cash basis, the certificate of employment with respect to the total price.

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

Plus the cost of contracts: In some contracts, CONTRACTED agrees to pay the contractor the cost (usually the cost) of work on the contract plus a percentage of it through the overhead and profits. These contracts are known as cost-plus contracts. The "cost plus" contract price is used in cases where it is very difficult for the contractor quote the price because there was no precedent that we can take as a basis. E 'as if the work to be done is not fixed at the time of release for the contract. The method is generally used when the government is contracted. The method suffers from the following drawbacks:

There is no incentive for the contractor to remove waste and economic costs of implementing the contract. On the other hand, one is tempted to increase the cost because the highest cost, plus its share of profit. With this system, the amount of overhead and profits depends on the value of materials used, which is subject to considerable price fluctuations. The fixed percentage defendant in May therefore be excessive or too low to cover overhead and profit.

Escalation clause: Climbing clause is generally included in the contract a clause against the likely changes in rates of use of equipment and manpower. This clause provides that if the prices of raw materials, labor, etc. specified in the contract, change during the execution of the contract, beyond a certain limit, above the price at the time of signing the contract, the contract price will be adjusted. The duration of the contract to specify how to calculate this adjustment in order to avoid future conflicts. For example, a clause safeguarding the interests of the contractor and contracted in the event of fluctuations in the price of materials and labor, etc.

Work in progress: At the end of the period of a contract in May in progress. The duration of the ongoing work relates to work done in connection with the contract, which is still incomplete. They are:

(1) labor certificate refers to the work approved by the infection. In respect of contracts is helpful in practice to get the contractor has approved the work from time to time by the infection. This is useful for entrepreneurs in two ways, first if the CONTRACTED does not specifications, you can ask the contractor to take corrective measures in time. Secondly, under a contract, the practice is useful to have a system of payments, ie, the CONTRACTED agrees to pay a certain percentage of the certificate of employment (eg 80 or 90 per cent). This is beneficial to farmers because it is immediately in cash.

(2) Corrections to work refers to work that has been done by the contractor, but not yet approved by the infection.

Certificates of work usually includes some useful elements, while the work is certified to the cost to the contractor.

Contracts: The contractor May sell part of the work to be done under the contract of a subcontractor. Usually, the specialized nature of work, ie, steel, flooring, etc, is done by subcontractors, who are responsible for the main contractor. The cost of these sub-contracts is a charge against the contract for which the work was done.

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