Question

A builder started to construct an apartment by spending $1Million initially and in addition, paid $50K for county approval. The construction was canceled due to regulatory issues. What is the Cost of imperfect contract? and  State the factors that caused the issue of imperfect contract?

Thanks.

Answer 1

The cost of imperfect contract:- One in which the different parties enter into mutual engagements are called contracts. Contracts are imperfectly reciprocal in which the obligation of one of the parties is a principal obligation of the contract as depotis, loan for use etc.

When there is loss on an imperfect contract, it is fully transferred to the profit and loss account. When the contract account of an incomplete contract shows profit, it should be treated as ‘National Profits’.

Example:- A builder started to construct an apartment by spending $1 Million initially and in addition, paid $50k for country approval. The construction was cancelled due to regulatory issues. The cost of imperfect contract is

$1Million + $50k = $1Million 50k.

Causes for the issue of imperfect contract:-

1. Imperfect Information.

2. Externalities.

3. Inefficiency.

4. Natural disasters.

5. Inability to write complete contingent.

6. Missing Provisions.

7. Human Factors.