## Contract Costs – Inclusions and Exclusions

Contract costs comprise three categories:

### Category 1: Costs That Relate DIRECTLY to the Specific Contract

Site labour costs (including site supervision)
Cost of materials used in construction
Depreciation of plant and equipment actually used on the contract
Cost of transportation to/from the contract site
Cost of hiring plant and equipment
Cost of design and technical assistance directly related to the contract

### Category 2: Costs ATTRIBUTABLE to General Contract Activity (Allocable)

Insurance premiums
General construction overhead (allocated systematically across contracts)
Borrowing costs where AS 16 capitalisation criteria are met

### Category 3: Costs SPECIFICALLY CHARGEABLE to the Customer

Costs explicitly agreed in the contract to be charged to the customer (e.g., general admin costs where the contract provides for reimbursement)

### Costs EXCLUDED from Contract Costs

Excluded Item	Reason
General admin overheads (non-reimbursable)	Not attributable to any specific contract
Selling costs	Period cost, not contract cost
Depreciation of idle plant (not used on construction)	Not related to contract activity
R&D costs	Period cost

### The Idle Plant Trap

Only the depreciation of plant actually deployed on the contract is includable. Depreciation of plant sitting idle on the contractor's premises is a period cost — excluded.

Worked example

### Example 1

Example: Classify Contract Costs (Ques 4)

Project costs incurred:

Material cost: ₹17 lakhs → Include (Category 1 – directly related)
Labour cost: ₹16 lakhs → Include (Category 1 – directly related)
Specific contract cost: ₹5 lakhs → Include (Category 1)
Sub-contract cost: ₹7 lakhs → Include (Category 1)
Advance paid to supplier: Ignore (not a cost incurred yet)

Total costs incurred to date = ₹45 lakhs

Note: An advance paid is NOT a cost — it becomes a cost only when the supplier delivers materials or services.

⚠️ Common exam mistakes

Including depreciation of idle/unused plant in contract costs — only depreciation of plant ACTUALLY USED on the contract is permitted.
Excluding general admin costs when the contract specifically provides for their reimbursement — these ARE contract costs under Category 3.
Including advances paid to suppliers as costs incurred — advances are assets, not expenses.
Including selling costs as contract costs — these are period costs regardless of the contract.
Ignoring borrowing costs when AS 16 qualifying asset conditions are met.

Bare-Act text Paras 15–21 (Contract Costs) · AS 7 – Construction Contracts · click to expand

Contract costs should 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 chargeable to the customer under the terms of the contract.

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