CONSTRUCTION CONTRACT

INTRODUCTION
the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed.

Construction contract
is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. 1. A fixed price contract 2. A cost plus contract

Contract revenue
Contract revenue shall comprise: (a) the initial amount of revenue agreed in the contract; and (b) variations in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue; and (ii) they are capable of being reliably measured.

Contract costs
Contract costs shall comprise: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically

Contract cost included

Costs that relate directly to a specific contract include: (a) site labour costs, including site supervision; (b) costs of materials used in construction; (c) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site;

Contract cost included

(e) costs of hiring plant and equipment; (f) costs of design and technical assistance that is directly related to the contract; (g) the estimated costs of rectification and guarantee work, including expected warranty costs; and (h) claims from third parties.

Contract cost included

Costs that may be attributable to contract activity in general and can be allocated to specific contracts include: (a) insurance; (b) costs of design and technical assistance that are not directly related to a specific contract; and (c) construction overheads.

Contract cost
Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs include: (a) general administration costs for which reimbursement is not specified in the contract; (b) selling costs; (c) research and development costs for which reimbursement is not specified in the contract; and (d) depreciation of idle plant and equipment that is not used on a particular contract.

Revenue recognition
Revenue recognition before delivery
Construction System consultant Aircraft or ship manufacturing

Mostly the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods.

Revenue recognition
Complete-contract method
Short period contract High risk

Percentage of completion method

More than 1 year contract Ignore the conservative concept Use periodicity and matching concept

Construction contract process

Company prepare budget bill of quality (BOQ) Bid the contract from customer
If success will sign the agreement contract price (P)

As Nature of construction time (T) and cost (C) can not reverse, if the agreement is not complete ontime, there will be some penalty.

> 12 month 9 month 12 month 12 month

1/1/X1

1/7/X1

31/12/X1

31/3/X2

31/12/X2

Percentage of completion contract method

Suitable for a project that
T . 1 year C and P can pre-determine and reliably measured

Exception : the project should not use this method if

A project that has risk, uncertainty about T, C, P Even the project period is more than 1 year

Contract

short

ime

Long

ost

Know

rice

Dont know Dont know Dont know Know

Complete contract method

Percentage of completion contract method

Step 1 # Calculation of percent complete

Input measure ( ) Cost to date Most recent estimate of total cost Accountant must communicate with specialist or engineer in order to gain update information and adjust the estimate cost of the project The adjustment made on yearly basis

Calculation of percent complete

Output measure ( ) output to date total project output Accountant must communicate with civil engineer in order to evaluate the percentage of work in progress The confirmation document is required

Step#2 calculate the revenue to recognized

Revenue to date = %of completion X estimate revenue of the project Current period Revenue = Revenue to date revenue recognized in prior period

Step#3 calculate the gross profit

Revenue to date = %of completion X estimate GP of the project Current period Revenue = GP to date GP recognized in prior period