Contract Cost is the total cost of the contract. It includes direct costs such as labor and materials, but also indirect costs properly allocable to the contract.
Allocating indirect costs to a contract can sometimes be difficult. Professional judgment must be exercised in selecting how costs are grouped and the rate applied against these groups of indirect costs.
But what about the cost of non-expenditure expenses. Operating unit costs for construction equipment may be included in the contract cost using the use rate theory.
A rate is determined which, based on the reported use of the equipment, serves as a basis for charging the contracts on which the equipment is used. The cost of the equipment shall be allocated to the particular contract on which it is used on a reasonable basis, such as time, hours of use, or mileage.
Idle equipment time may be considered in determining indirect cost allocations.
In applying the use rate theory, all of the following factors shall be considered—
• Cost of the equipment, less estimates of its salvage value or rental if it is leased
• The probable life of the equipment
• Average idle time during the life or period of hire of the equipment
• Costs of operating the equipment, such as repairs, storage, insurance, and taxes