Contract costing is a broad term which can refer to different specifics of contract accounting, but can generally be defined as- the means by which labour and/or services are charged to a customer for a project.
This can either be fixed - whereby the total cost is determined at the beginning of the contract, and not negotiable by either party at the end or during the time the work is completed.
The advantages of this are as follows:
- The customer has peace of mind and does not have to worry about unforseen costs.
- The contractor knows that the customer has agreed to, and is happy about the price, so quibbles with payment are less likely
Or, it can be Time & Materials (T&M) whereby the total cost is charged according to the actual number of hours work (time) and the cost of the equipment used (materials).
The advantage to this approach are:
- Transparency. The contractor can show exactly what the customer is paying for.
- Protection for the seller. If the job takes longer than expected, they are not tied to the previously agreed price which could not account for unforseen circumstances.