Brief introduction

A contractor business accomplishes the work given on a contract basis. The contractor can be an individual or a registered company and it works till the completion of the project or even after its completion for the maintenance purposes as per the terms and conditions of the contract.

For example, a building contractor in order to construct a five-story building will direct, supervise and complete the construction work as per the terms and conditions set by the two parties i.e the contractor and its client.

Calculation of cost of goods sold for a contractor

A contractor can accomplish all the designated work by itself or can further designate or sub-contract to a third party. Duration of a contracted work can be completed in a single period it can be extended over many periods.

The universal formula of cost of goods sold applies here in a similar manner i.e the opening inventory of direct material, direct labour and manufacturing overheads, and add all the purchases made during the period for the completion of contracted project less the direct material and other purchases unutilized at the end of the period.

In short the resource consumed by the contractor during the period in order to complete the project is termed the cost of goods sold.

Costs that cannot be included as cost of goods sold

The cost of goods sold by a contractor should not include the indirect expenses such as shipping and transportation cost. Cost of sales should only contain be included the direct cost attributable to the contracted project not the irrelevant costs.

Related article  Accounting for Indirect Material

Nature of cost of goods sold for a contractor

The business nature of a contractor is mainly related with the construction of small houses as well multimillion mega projects. Thus it is very important for a contractor to keep an eye on the cost of goods sold which is the ultimate and major chunk of the contractual work. The contractor should try to reduce the associated cost of the project because it cannot avoid the main construction cost, what he can do is to keep control on the avoidable losses.

Information for decision making

The cost of contracted work is prime decision making factor for the contractor as well as the client. The contractor’s work ranges from a small task to the mega project which in somr cases requires a years or even decades to complete. The contractor should be in a good position to correctly calculate the estimated amount of cost of goods sold at the time of the contract and also the projected cost of goods sold over the period of time in order to gain maximum possible profitability from the contract. Otherwise the contractor may incur a huge losses if unable to calculate the correct amount of cost of goods sold for a particular project because this is the prime cost of the whole project in majority of the cases.   

Types of contractors

Contractors can be divided into three tiers according to the size of business entity i.e small contractor taking a very small and simple tasks such as the construction of a small house or a building, a medium contractors taking contracts for the construction of a 5 storey building or multiple of it like a housing society and finally the large contractor taking tasks of multimillion projects such as the construction of airports, motorways, dams, canals and housing scheme on a large scale.

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Taxes on contractors

The contractor works with many entities at the same time or even sub-contracts the work in order to timely complete the project thus can face a complex taxation matters. It is advisable for the contractor specially of medium and large sized to hire a tax specialists in order to fullfil all the responsibilities of a contractor on timely basis.

Impact of costs on financial statements

The financial statements of a contractor company mainly depends on the correct calculations of cost of goods sold because the ultimate result of gross profit or gross loss can highly effect on the financial health of the entity. Thus it is advisable and specially is mega project to involve highly qualified officials in order to calculate the estimated cost of goods sold and projected cost of goods sold and try to include variable terms related to the costs of the project.

Conclusion

Cost of goods sold for a contractor is very risky and highly technical job thus a care must be taken before entering into the contracts. The cost of sale can be very judgemental in deciding whether to agree with the contract or not.