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CONSTRUCTION CONTRACTS (AS-7)

A. Types of Construction Contract: Construction contracts are of two types:

a. Fie! price contracts -In this case of contract, contractor agrees for fixed price of thecontract or fixed rate/unit. However, in some cases the contract price is subject to

escalation.

". Cost-p#us contract -In these contracts, contractor is reimbursed the cost fixed percentage ofprofit.

$. Ca#cu#atin% t&e profit or #oss of a construction contract: rofit or loss onconstruction contract is Contract revenue ! Contract Cost.

C. Contract re'enue: Contract revenue includes/ excludes the following:

A!!Inc#u!es:

a. "evenue/price agreed as per Contract.

". "evenue arising due to escalation clause.

c. #hen a fixed price contract involves a fixed price per unit of output, contract revenueincreases as the number of units is increased.

!. $ariations, Claims % Incentive payments.

ess*c#u!es:

a. enalties arising from delays caused by the contractor in the completion of the contract.

". $ariations.

*. A 'ariation is an instruction by the customer for a change in the wor& to beperformed. It may lead to an increase/decrease in contract revenue. $ariations are consideredonly when:

a. 'here is a certainty of collection (it is probable that the customer will accept) the variation%

". 'here is a certainty of measurement.

F. A c#ai+ is an amount that the contractor see&s to collect from the customer asreimbursement for costs not included in the contract price. *xamples are customer causeddelays. Claims are considered only when:

a. 'here is a certainty of collection %

". 'here is a certainty of measurement.

,. Incenti'e pay+entsare additional amounts payable to the contractor if specifiedperformance standards are met or exceeded. *x. an incentive payment to the contractor for

early completion of the contract. 'hese are considered only when:a. 'here is a certainty of collection %

". 'here is a certainty of measurement.

. ercenta%e of co+p#etion +et&o! (C/):+s per + -, the contract revenue willbe recognised with reference to '+* 0 C12*'I3 at the reporting date. 'his is calledC/.

I. 0eter+ination of sta%e of co+p#etion:

a. Cost to Cost +et&o!: 'he percentage of completion would be estimated by comparingtotal cost incurred to date with total cost expected for the entire contract:

ercentage of Completion 4 Cost to dateCost incurred 5 *stimated cost to complete

Current period revenue from Contract 4 Contract price 6 ercentage of completion 7"evenue previously recognised.

Accounting Standards___________________________________________ 1

MASTER MINDS

6 899

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". Tec&nica# sur'ey +et&o!:

*.%.:+ construction contract of a two floor building for "s. 8; la&hs (with a ;9 margin)

0i'isions ofcontract

Tec&nica#Co+p#etion

Cost toco+p#ete

0oundation

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articu#ars 9ears

1st n! ;r!

Initial contract revenue"evenue increase due to escalation in =nd

yearClaim from contracteeIncentive paymentsenalties

8999!!!!!!!!!!!!

8999=99!!!!!!;9

8999!!!

8998;9!!!

So#.: Calculation of contract revenue:

articu#ars 9ears

1st n! ;r!

Initial contract valueIncrease in revenue due toescalationClaimsIncentiveenaltiesContract "evenue

8999!!!!!!!!!!!!

8999

8999=99!!!!!!

(;9)88;9

8999

=998998;9(;9)8>99

Q.2. 1HI' 2'A. has underta&en bridge construction contract to be constructed in < years. Initialcontract revenue "s.B99 crores. Initial contract cost "s.99 crores.

articu#ars 9ears

1st n! ;r!

*stimated contract costIncrease in contract revenue*stimated additional increase costContract cost incurred upto

9;!!!!!!

8D8

!!!=98;

;>

!!!!!!!!!

=9

+t the end of =ndyear cost incurred includes "s.89 crores, for material stored at the sites to beused in ! 89)rofit9ear III:"evenue (B=96899)*xpensesrofit

898D88B

D>>;->-9

B=9=9899

!!!!!!!!!

898D88B

D>>;->-9

898D88B

>D>>8DEincl. 89crores mat)

=9

B99=9

B=9=9

=9

Accounting Standards___________________________________________ 3

MASTER MINDS

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tage of completion =9(8D8/9;6 899)

-9(;>!89/=9

6 899F

899(=9/=96 899)

Q.3. + firm of contractors obtained a contract for construction of bridges across river Grishna.'he following details are available for the year ended . It estimated construction cost initially at "s.-9 crores. Contract was estimated to becompleted in three years. However, when starting the wor& it was found that there were roc&sunderground at construction site and cost shall increase by "s.