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 you can manage it all and succeed, but only if you have the information you need.
It’s the data you don’t have that can cause problems. How can you make the best decision for your business when you don’t have all the information?
Committed Costs is a construction accounting tool you should use to get a complete and accurate picture the health of your jobs, so you can make better decisions. Committed costs fill in a dangerous gap in your job costs – a gap that can lead to spending cash you don’t 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.
What Are Committed Costs?
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. 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.
Let’s look at committed costs on the job:
- An open contract or subcontractor agreement is a committed cost. You haven’t paid the contractor yet, and at first glance it might appear the money is still available, but it’s money already committed.
- Purchase orders applied to a job are also committed costs. Even if you are waiting for delivery or the bill for the materials hasn’t been paid, they are a committed cost.
- As time comes in from the field, it becomes a committed cost. Even if the payroll hasn’t gone out, that money is committed. 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 are another committed cost. When you use a credit card for supplies or materials in the field, that money goes against the project budget.
When you aren’t tracking committed costs, you put your budget at risk. You aren’t getting the big picture on expenses, and you don’t really know the score for the job. Planning and finances become guesswork and estimates.
You need committed costs to get a real-time view of job costing – the money you’ve already spent and committed and the budget remaining for the job.
Start Using Committed Costs for Your Business
Many contractors still using manual accounting and bookkeeping methods struggle to track committed costs. This can lead to double billing and mistakes. Accounting that software that isn’t designed for construction or contracting work may not have the level of detail, control, and visibility you need to track committed costs. They aren’t designed for it.
Construction accounting systems are designed to provide the visibility you need into committed costs. They can automate the process, so you aren’t causing errors. Construction accounting system puts critical information on committed costs at your fingertips when you need it, so you can make better business decisions.
Have any questions regarding committed costs and how you can improve your business using them? Feel free to reach out to us at firstname.lastname@example.org and we’d be happy to talk with you.