Understanding committed costs for projects

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

  1. Project Accounting settings:

    1. Choose to track committed costs and accruals in the settings. This enables the Create and Reverse Project Accruals menu option.
    2. Enter the Committed costs and accrual settings. Use this to choose the default nominal account for your accrual postings.