1. Accounting for construction contracts (LKAS 11)
Rangajewa Herath
B.Sc. Accountancy and Financial Management(Sp.)(USJ)
MBA-PIM(USJ)

2. What is a construction Contract?
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.

3. Types of contract based on Pricing Method
1. Fixed Price Contract
e.g: Contract Price = Rs.100 million
2. Cost plus Contract
e.g: Contract Price = Cost + 20%
e.g: Contract Price = Cost + Rs.20 million

4. The main issue in relation to accounting for constriction contracts
Date of commencement
Date of Completion
01/07/
2014
01/07/
2012
01/01
/2012
31/12
/2012
31/12
/2013
31/12
/2014
Contract period
Contract Price = Rs. 100 million
Contract cost = Rs.80 million
Contract Profit = Rs.20 million
How much revenue, cost and profit should be recognized for year ended 31/12/2012, 31/12/2013 and 31/12/2014 ?

5. Stage of Completion = Value of work certified x 100%
(a) surveys of work performed
(b) completion of a physical proportion of the contract work
(c) the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs
Stage of Completion = Value of work certified x 100%
Total contract price
Stage of Completion = Nos. of units completed x 100%
Total Nos. of unit
Stage of Completion = Cost incurred x 100%
Total estimated Cost

6. Exercise 1: Answer Contract A
Stage of Completion = Work Certified x 100% Contract Price
= 300 x 100%
500
= 60%

7. Exercise 1: Answer Cont.. Contract B
Stage of Completion = Cost incurred x 100% Total estimated cost = 240 x 100% 600 = 40%

8. Exercise 1: Answer Cont.. Contract C
Stage of Completion = Cost incurred x 100% Total estimated cost = (315-15) x 100% 600 = 50%

9. Exercise 1: Answer Cont.. Contract D
Stage of Completion = Number of houses completed X 100% Total number of houses in the contract = 200 x 100% 500 = 40%

10. Contract Revenue
Contract Price
Variation
Claims
Incentive payments

11. A variation is an instruction by the customer for a change in the scope of the work to be performed under the contract. A variation may lead to an increase or a decrease in contract revenue. Examples of variations are changes in the specifications or design of the asset and changes in the duration of the contract.
A claim is an amount that the contractor seeks to collect from the customer or another party as reimbursement for costs not included in the contract price. A claim may arise from, for example, customer caused delays, errors in specifications or design, and disputed variations in contract work. The measurement of the amounts of revenue arising from claims is subject to a high level of uncertainty and often depends on the outcome of negotiations

12. Incentive payments are additional amounts paid to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract.

13. Contract Cost (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
(c) Such other costs as are specifically chargeable to the customer under the terms of the contract

14. Exercise 2 :Answer
Contract A Revenue = 500 x 60% = 300 Cost of sales = 400 x 60% = (240) Profit = 60 Contract B Revenue = 800 x 40% = 320 Cost of sales = 600 x 40% = (240) Profit = 60

15. Exercise 2 :Answer Cont…
Contract C
Revenue = 750 x 50% = 375
Cost of sales = 600 x 50% = (300)
Profit = 75
Contract D
Revenue = 600 x 40% = 240
Cost of sales = 450 x 40% = (180)
Profit = 60

16. Expected loss of a construction contract
Should be recognized as an expense immediately