Q:

What is contract costing?

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Quick Answer

Contract costing refers to the process of tracking all of the costs associated with a particular customer's project or contract. This type of cost tracking process is typically used when the customer will be billed based on the actual costs incurred in either servicing the contract or completing the project. Contract costing is a prerequisite with regard to the billing process if the costs incurred will be detailed in the customer's invoicing.

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Full Answer

When the costs of completing a project or servicing a contract are going to be detailed in the customer's invoicing, the accuracy of the tracking systems in place is critical. The customer can otherwise be undercharged or overcharged.

Customer invoicing that reflects an undercharge hurts the company providing the work or service, but overcharging can result in the customer disputing what might be perceived as unreasonable costs or fraudulent billing methods. The expense of effective and reliable accounting procedures in a contract costing situation can represent a significant amount of the related overhead, but insufficient oversight and the potential for error can be costly and possibly damage the company's reputation.

In the case of fixed fee billing, the customer may not be aware of the actual costs incurred, but the work or service provider needs to be assured that it is charging appropriately and not bidding or quoting below costs. In a fixed fee billing situation, contract costing represents a means by which a company can analyze its expenditures and procedures to determine whether it is operating effectively and in a profitable manner.

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