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In Chapter 4, the differences between job and contract costing are noted. One of the key differentiating items in contract costing is time. In essense, contract and job costing are similar, but the extended timeframe of contract type “jobs” means more costs tend to be directly attributable i.e. there are less problems with allocating indirect costs, such as overhead. Another differentiating factor is how contracts are typically paid for. Most contracts involve some form of stage payment, typically on some certification of work done.  Contracts also typically bring the accruals concept into play, as costs and revenues are spread out over several year, and thus profits (and losses) need to be attributed to several financial years.

Large scale infrastructure. construction or public sector contracts are typcial scenarios when contract costing may be used.  Such contracts bring other issues too, mainly of a political nature. The Financial Times reported a good example of this type of issue on Sept 17, 2013. A contract for US Navy aircraft carriers has been affected by recent cuts in the US defence budget.  In an effort by the Pentagon to retain key longer term spending, instead of awarding a contract outright, it has for example awarded a preliminary contract for early stages of construction of an aircraft carrier. This preliminary contract allows a supply chain to be built-up, in the hope that the full contract can be awarded to completion. From a contract costing view, this “extending” of the contrat creates more headaches for the accountants involved – more costs to trace over a longer timeframe essentially. 

 

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