Imagine a construction company building a highway overpass — the project spans 3 years, costs crores, and can't be invoiced all at once. That's exactly what Contract Costing is designed to handle: a form of Specific Order Costing used for large, long-duration jobs where each contract is a unique cost centre.
The core challenge in contract costing is profit recognition — how much profit do you show in your books each year, even though the contract isn't finished? The ICAI follows a conservative approach tied to the stage of completion, measured by: Work Certified ÷ Contract Price. Here's the rule: if less than 25% complete, recognise no profit at all (too early to be sure). Between 25–50%, transfer 1/3 of Notional Profit × (Cash Received ÷ Work Certified) to P&L. At 50% or more, use 2/3 of Notional Profit × (Cash Received ÷ Work Certified). Notional Profit = Value of Work Certified − Cost of Work Certified (i.e., total cost to date minus cost of uncertified work).
Two more terms you must know: Retention Money is the amount the contractee (client) withholds until the project is fully complete — it's a security deposit, not yet your cash. Work Uncertified (also called WIP on contract) is work done but not yet approved by the architect/surveyor — it stays on the balance sheet as an asset. If the contract is heading for a foreseeable loss (estimated total cost > contract price), the entire anticipated loss must be charged to P&L immediately — no phasing it out. This comes up frequently in 4-mark and 8-mark questions, often with a partially completed contract and a table to fill.