IAS 11 : Contract Costs

1.7 Contract Costs

Contract costs should be expensed as incurred. Costs may be carried over to future periods only if they will be reimbursed in those periods.

Revenue is generated as detailed in the previous section, and matched with the costs of the period as detailed in the following section.

Contract costs comprise:

1)     Costs that relate specifically to the contract.

2)     Other costs chargeable to the client, under the terms of the contract.

3)     Costs allocated to contract activity in general, which are allocated to the contract.

Costs relating specifically to the contract include:

1.     Site labour costs, including supervisors.

2.     Materials used in construction.

3.     Depreciation of plant and equipment used.

4.     Transport of staff, materials and assets to the site.

5.     Hiring plant and equipment.

6.     Contract design and technical assistance work.

7.     Rectification, guarantee, and expected warranty costs.

8.     Claims from third parties.

Incidental income (from sale of equipment at the end of the contact, surplus materials and scrap) will reduce these costs.

Example:

You are demolishing an old building, prior to building a call centre. You sell the materials from the old building for scrap. 

This is incidental income.

Other costs chargeable to the client may include some general overheads, or development costs, that the client has agreed to be billed under the contract.

Example:

You are building 100 branches of various sizes. Your client asks that you spread the architects’ fees over costs of all the branches.

This is an example of general development costs being spread over different contracts.

Costs allocated to contract activity in general include:

1.     Construction overheads.

2.     Insurance.

3.     Borrowing costs of the contractor.

Borrowing costs of the contractor should be expensed as incurred.

Borrowing costs of the owner are the subject of IAS 23 and may be capitalised according to IAS 23..

Costs that are not included in the contract, and cannot be allocated to the contract, are treated as general overheads.

Costs incurred in securing a contract can be included as contract costs, if they are separately identifiable, and it is likely that the contract will be won.

Example:

You have a team whose sole job is to write bids for construction contracts, and negotiate them up to the point of signing contracts. All costs can be allocated to separate bids.

Their costs should be expended in each period, except those costs for bids likely to be won. Costs for bids likely to be won would be carried forward as an asset: prepaid expenses for contracts.