Contract Costing Terminology
Principles of profit income recognition in contracts
The Notional Profit
This is a component of two items as:
a) Profit taken = Notional profit x 2/3 x cash received/work certified
This formula of calculating the part of national profit taken in the year is employed while substantial costs have been incurred upon the contract although the contract is not near completion. However when the contract is near completion the profit considered is calculated like:
"Profit taken = Estimated profit x cash received/contract price".
Where Estimated profit = Contract price - Estimated total cost and
Estimated total cost = Costs incurred to date and estimated future costs.
b) Profit not taken = refers to the part of the national profit such is not recognized in the recent period. It is profit carried forward to be acknowledged in the years such follow.
c) Retention Money
It is a portion of the value of work certified such retained via the contractor to protect himself from faulty work which might be evident at the time of progress payments or at the completion of the contract. This amount is released after satisfactory performance beneath the contract.