If you watched the first part of this series, you  learned some basics about Job Costing and its importance in building out good reporting for project managers. Now, let’s go further. While job cost reports are important, they don't always tell the full story. They are a snapshot of actual spending to date on any given project. But project managers need more context. 

In addition to seeing what they've already spent against the project budget, project managers want to know how much more they are going to spend. That's called committed costs. 

Let’s take the following scenario as an example of why a committed cost report may be more useful than a job costing report. In our example, a project manager is reviewing a job cost report for a specific project and realizes that a cost related to a subcontractor is missing. They had a subcontractor out on the job site three weeks ago, but the job cost report they’re looking at doesn't include that cost. Why? Is this report unreliable? Are people in accounting not entering all the invoices? What's going on here? 

The answer is simple. The project manager is looking at the wrong report. And this is why the Project Manager needs to learn about committed cost reports. Chances are good that people in accounting are doing their job. It's just that the subcontractor is slow in billing, and that invoice hasn't been received, so it won't show up on a job cost report yet. 

But it will show up on a Committed Cost Report. Now, before we dissect a Committed Cost Report, let's get a good understanding of what exactly a committed cost is. 

Committed Costs refer to the project expenses that have been committed to in advance but have not yet been paid or incurred. Committed Costs fall into one of three categories: subcontracts, purchase orders, and material requisitions. First, let’s talk about subcontracts.

Subcontracts are lump sum commitments we make to subcontractors. So it makes sense that they would involve subcontractor cost types, like labor, materials, management fees and markup.  Depending on the subcontract, cost types may also include insurance and bonding costs, and any costs for permits and licenses. If there are any changes or modifications to the subcontracted work, change orders may incur additional costs.

Purchase Orders are quantity and unit cost commitments, used for material and equipment cost types. Examples include material types like steel beams, pvc piping, or electrical wiring, and equipment purchases, like a concrete pump or an excavator. A Purchase Order will typically include the following elements:  

1. Purchase Order Number

2. Buyer and Supplier information like phone numbers and addresses

3. Item Description, including specifications, quantities, and any applicable codes or standards

4. The agreed-upon unit price for each item and the total cost, calculated by multiplying the unit price by the quantity.

5. Delivery details, like timeframe, shipping instructions, and any specific requirements related to delivery location or method

6. Terms and conditions, such as payment terms, warranties, quality requirements, return policies, or other contractual terms.

Now, Material Requisitions are a committed cost you'll see in larger ERP systems. This gives visibility into how much internal inventory - namely material -  is being committed to a project. 

You'll notice that other cost types are listed under both subcontracts and purchase orders. That's because there are no hard and fast rules on how other costs - like a porta-potty rental - is committed out. Both purchase orders and subcontracts have been used in instances like this. 

The large cost type that you might have noticed is missing from this list is labor. This is because there is no paper commitment to labor, so it’s not considered a committed cost.

Now, before we close out this short session on Committed Costs, let’s review some vocabulary. Did you know that the act of issuing committed costs, like POs and subcontract agreements, is often referred to as “Buyout?” The buyout phase is the transitional time between pre-construction and construction. This will be useful as we move forward in learning about committed costs!

Now that we have a good understanding of what committed costs are, let's dive a little deeper. Here's an example of a purchase order we did for the slab on grade cost code on the 4021 Paradise Road project. It looks pretty straightforward. 

Here's our vendor. Here's where the materials should be shipped to, and some special instructions to the vendor. As we saw earlier, purchase orders are quantity driven. And you can see that here. We're buying 600 tonnes of aggregate base quartz at a unit cost of $16.93 per tonne, for a total commitment of about $9,800 for that item. Subcontract agreements, on the other hand, are lump sum. We have very similar information that you saw on the purchase order. Here's our information, here's the vendor, and there's the project and the commitment date. 

Now, a subcontract is going to have a lot of legal jargon attached to it. While purchase orders are usually one, maybe two pages long, a subcontract agreement can have dozens of pages. 

Now that we have an understanding of what a committed cost is, let's see what that looks like on the reporting side. 

As you recall, we ran a job cost report called a cost Detail Report to show how much money has been spent on slab on grade at the 4021 Paradise Road project. It was $40,000. Let's take that $40,000 now and compare it to our budget for slab on grade. 

If we look at this at face value, the company is doing alright financially. We’re only at 26% spent on our budget and, after thinking about this a little bit, we estimate that we are about 40% complete with this piece. 

So, you can imagine that a project manager might see this and predict they’re actually going to be under budget and feel like a really effective project manager. 

But now, let's consider this along with the committed costs we just talked about by looking at a project committed costs report. Yes, the company has spent $40,000. But eventually they're going to be billed for about $9,700 from Vulcan materials for that aggregate face course they ordered on the purchase order we talked about, and an additional bill for $103,000 should be coming in from Yates concrete on the subcontract agreement they've committed out. So, in addition to the $40,000 that has already been spent, this company has another $112,000 coming in. 

Now if we extend that out, all of a sudden, the project manager goes from being a really effective project manager to a project manager who is scrambling to try to make up for an over budget item, because now they’re looking at total cost to date, plus the committed cost. 

They're at $152,000. That's 101% of their budget of $150,000. Now, you can see how important it is to talk about committed costs and job cost reports to make sure project managers are getting the full picture. When a construction company owner asks “how much did we spend on slab on grade on the Paradise Road project?” We can tell them what we spent so far, and how much we've committed to spend before the end of the project. That's useful information.

Committed costs, along with other accounting workflows, can be difficult to manage in a way that maximizes your organization's efficiencies.

Trimble Construction One is a connected suite which connects your office to the field to streamline these workflows with the industries’ leading solutions to give you the right data for your projects. Check out what Trimble Construction One can do for you.