What Are Committed Costs in Construction Accounting?

As the owner of a construction company, the success of the company is on your shoulders. You need to lead the construction team, work with clients, seek out new business, and manage money.

With the right tools such as Deltek + ComputerEase’s robust accounting software, you can manage it all and succeed, but only if you have the information you need.

Not having accurate data can cause major problems. How can you make the best decision for your business when you are not tracking expenses correctly?

How to Account for Your Expenses

If you are struggling to better understand the expenses that you have committed to, there is a way you can manage them in your Deltek + ComputerEase software.

In case you are not familiar with the accounting term, a committed cost is a payment obligation that you can’t recover. You are committed to paying that money no matter what. Money that is obligated for an expense is a committed cost. Once that money is spent, and goes out, it becomes cash out.

Committed costs are a baseline in job costing. With job costing, you can see where you have money committed in a project. Using committed costs, you can see immediately cash that is obligated. You know, with certainty, the money you have available for future expenses and additional costs.

Committed costs give you a complete and accurate picture of the health of your jobs to make better decisions. Committed costs fill in a dangerous gap in your job costs – a gap that can lead to spending cash you do not have or wasting money on unnecessary expenses.

With committed costs, you know the score and have the information you need to come in ahead of schedule and under budget.

Here are several examples of committed costs:

• An open contract or subcontractor agreement - You have not paid the contractor yet, and at first glance it might appear the money is still available, but it is money already committed.
• Purchase orders applied to a job, even if you are waiting for delivery or the bill for the materials hasn’t been paid
• As employees enter time from the field, even if the payroll hasn’t gone out - For example, if you pay employees every two weeks, you need to track labor and hours during those two weeks even if the money hasn’t gone out yet. That’s unposted payroll – a committed cost that will impact your bottom line.
• Expenses in the field - When you use a credit card for supplies or materials in the field, that money goes against the project budget.

When you are not tracking committed costs, you put your budget at risk. You are not getting the big picture on expenses, and you don’t really know the score for the job. Planning and finances become guesswork and estimates.

Committed costs give you a real-time view of job costing, which is the money you’ve already spent and committed and the budget remaining for the job.

How to Make Better Business Decisions

Many contractors still using manual accounting and bookkeeping methods struggle to track committed costs, and this can lead to double billing and mistakes. Accounting software that is not designed for the construction industry may not have the level of detail, control, and visibility you need to track committed costs.

Construction accounting systems like Deltek + ComputerEase are designed to provide the visibility you need into committed costs. They can automate the process to avoid errors and put critical information on committed costs at your fingertips when you need it, so you can make better business decisions.

For more information regarding committed costs and how you can improve your business using them, download the Ultimate Construction Accounting Guide. You can also hear from construction accounting expert John Meibers in this free Construction Accounting University class about Job Costing.