The costing method commonly practiced in the construction industry is contract costing. Contract costing is a technique used to track the cost of a specific contract with a specific customer. When two parties enter into a contract, for example, a construction company enters into a contract with its client, they will have to agree on some terms of the contract and one of the most important terms is the type of reimbursement to the construction company. There are few types of reimbursement and they are normally based on the cost incurred by the construction company. The construction company must be able to track costs related to the contract so that it can justify invoicing the client. (Contract Costing: Accounting Tools, 2011) Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay There are a few common types of contract costs with different reimbursement methods: fixed-price/lump-sum contract, cost-plus-contract, time-and-materials contract, and also unit-price contract. (Rodriguez, 4 Common Types of Construction Contracts: The Balance, 2017) In the case of a fixed price/lump sum contract, two parties will need to agree on a lump sum price before all work begins and the contractor will need to submit a total price for their project. This costing method estimates the cost of materials, the cost of labor plus a calculated amount of money that should cover all overhead expenses and the contractor's profit margin. However, this contract is not guaranteed for the contractor as the price is fixed and he could have incurred higher costs than the agreed price. In a fixed price contract, the customer will transfer all risk to the contractor as they are responsible for the correct execution of the work using their own means under this contract. However, the contractor can ask for a higher return as he bears all the risks. This costing method is recommended for projects in favorable and stable conditions. (Rodriguez, Learn About Lump Sum Construction Contracts: The Balance, 2017) For cost plus contract, the client will pay the contractor all related expenses agreed to in the contract plus a profit amount to the contractor. Unlike the fixed price contract, this contract improves the contractor's situation as he is more likely to recover all expenses and risks. They are not required to submit a total cost estimate before starting work and can receive ongoing reimbursement from the client. Some clients will set a limit to prevent the contractor from overspending on construction costs. This contract is suitable for situations with uncertainties. (Rodriguez, Construction Contracting: All About Cost-Plus Contract: The Balance, 2017) Under a time and materials contract, the contractor is paid based on the cost of direct labor and direct materials used plus an amount that covers overheads and the contractor's profit. (Time and Materials (T&M) Contract: Business Dictionary, n.d.) For time and materials contracts, the rate of pay for all labor and staff is specified and typically adds a margin of 15 to 35 percent on the material used. This contract is the safest contract for the contractor and the customer assumes almost all the risk. It is only recommended for projects that are unable to estimate accurately and the project scope cannot be defined. In order to protect the client, they will set a maximum amount the contractor can charge and also the maximum labor hours they can use to optimize the contractor's efficiency.(Rodriguez, Time and Materials Contracts: The Balance, 2017) Under the unit price contract, the past history and current condition of the asset to be maintained are used to estimate the work when establishing this contract. With this estimate figure, contractors are given a more accurate estimate of the work and labor based on how they will be paid. However, this estimated figure is not the full contract price, and the full contract price is the amount incurred after all work has been performed. The unit price contract uses estimated quantities of items and unit prices of items such as the hourly rate or rate per unit of work volume as the basis for estimating the cost of a project. It is recommended to use this contract when it is not possible to accurately estimate quantities before the construction project begins. It is also suitable for recurring tasks. (Unit Price Contracts: Government of the Northwest Territories, 2009) Labor Costing in the Service Industry Labor costing is a technique for accumulating all cost information, such as the cost of materials, labor, and overhead for a specific job. This information is useful for a service company as it will be presented to the client under the contract so that the client knows how much this work will cost. Furthermore, you can also check the accuracy of the company's estimating system as this system plays an important role in quoting a reasonable price for the customer. There are three main types of information that a job costing method should include: direct materials, direct labor, and overhead. (The Job Costing System: Accounting Tools, 2015) Some service companies track direct materials for each job, while others do not. For example, accountants or lawyers use binders and paper when providing their service. However, these costs will not be included in direct materials as the value of these materials is too insignificant. These materials are known as supplies and are often treated as overhead costs rather than direct material costs. For some service companies, material costs are more considerable and they will monitor the direct material cost for each job. For these service companies, these materials are significant in conducting business. For example, for a car mechanic, who needed vehicle spare parts to perform the repair service, he will track the cost of these direct materials for each job performed. (Labor Costs in Service Organizations: Saylordotorg, n.d.) For some service companies, direct labor costs may cover most of the labor costs. To assign direct labor to a job, there are some methods used by the service company which include the use of time cards, timesheets or network time clock applications. This way, they can track the cost of labor incurred as all staff working hours are recorded for each job. (The Job Costing System: Accounting Tools, 2015) Overhead is assigned to one or more cost pools and will be charged to each job when it comes to the end of the accounting period. These overhead costs are assigned to each job based on certain cost drivers. The cost driver for overhead in the service industry is often direct labor hours or direct labor costs. Therefore, most overhead is allocated to each job based on the direct labor hours used or the direct labor cost incurred for the specific job. (The cost system of, 2015)