Understanding committed costs

To get a true picture of the total cost of a project and its proposed profitability, you need to take into account the costs booked to the project (purchases, stock, bank payments, miscellaneous costs and timesheets) and include any outstanding committed costs.

Outstanding committed costs are commitments to pay for something you have ordered or received, but have not yet paid for. For example, purchase order items that are yet to be invoiced, or stock allocations and timesheets that have not yet been posted.

Despite efforts to control costs, many businesses will suffer from budget overruns. A frequent cause of this is because committed costs are not managed effectively.

A lot of businesses attempt to measure their budget against actual spending using information provided by the costs entries made in their accounting system. However, in reality there is often a time lag between a financial commitment being made and when it is actually paid, which is called an accounting lag.

The graph illustrates the actual costs incurred during the procurement phase and when the project is in progress. The actual costs are below budget when the work is completed, but the outstanding committed costs take the project over budget during the accounting lag period.

In some cases, the accounting lag can be a period of months, which could mean a business may not be take into account unpaid committed costs when analysing their budget against costs. This may cause the business to overstate budget balances and lead to overspending.

To set up and enter committed costs and accruals

Project Accounting settings:

Choose to track committed costs and accruals in the settings. This enables the Create and Reverse Project Accruals menu option.
Enter the Committed costs and accrual settings. Use this to choose the default nominal account for your accrual postings and how you want to update project records for free text and service items.

To enter these settings

Open: Project Accounting > Utilities > System Setup > Project Accounting Settings | Features.

Select Record and Track Committed Costs if you want to record committed costs for your projects, and click Settings.

Default balance sheet nominal code for accrued cost posting

Select the default nominal account to which accrued costs will be posted. This will be displayed as the default nominal account when entering a project accrual.

Default project up for service items is when:

Specify when project records will be updated for service items. They can be updated when the invoice is recorded or when goods are received.

These options are only enabled if you have chosen to record the confirmation of service items in the POP Settings. These options cannot be changed if there are purchase orders on the system that have not yet been invoiced.

Default project update for free text items is when:

Specify when project records will be updated for free text items. They can be updated when the invoice is recorded or when goods are received.

These options are only enabled if you have chosen to record the confirmation of free text items in the POP Settings. These options cannot be changed if there are purchase orders on the system that have not yet been invoiced.

Note: The costs of stock items are only realised when the stock is issued to the project and not when the goods are received or the invoice is recorded.