POs nobody adds up until the bills arrive
Add up open POs and subcontracts by job before the PM enters cost to complete.
Job cost from the books only shows what has been billed to you and posted. A job with a $300K PO for equipment and a $200K subcontract may show a cost to date well under budget, and the PM thinks the job is fine. Then the bills come in three months later and the margin is gone. For a controller, committed cost is the number that keeps cost to complete honest, since it's the part of the future cost you can't change.
Three moves, in order
What CFOS does about it
CFOS reads jobs, cost codes, vendors, bills and POs from QuickBooks Online and writes back to it. Emailed bills are read, coded to a job and checked against the PO, so you can see how much of each commitment has been billed. Job cost by cost code against the budget updates every hour, with seven cost types and three levels of cost code. The PM enters the month-end cost to complete, it's approved, and the WIP schedule shows over and under billing while the master WIP rolls the jobs together. Committed cost gives the controller a way to question a cost to complete that looks too good.
Who owns this: Controller, with the PMs.
At $15M, open POs can top a month of overhead before posting.
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Step 07: Monthly cadence
Weekly bookkeeping, cost to complete, and one CEO report, on the same days every month.
Other problems step 07 solves
Other things that go wrong
What owners ask
Committed cost tracking construction?
Add up open POs and subcontracts by job before the PM enters cost to complete. Job cost from the books only shows what has been billed to you and posted. A job with a $300K PO for equipment and a $200K subcontract may show a cost to date well under budget, and the PM thinks the job is fine. Then the bills come in three months later and the margin is gone. For a controller, committed cost is the number that keeps cost to complete honest, since it's the part of the future cost you can't change.
Which part of the system fixes this?
The step is number 07, monthly cadence. Weekly bookkeeping, cost to complete, and one CEO report, on the same days every month. It's drawn from chapter 7 of CONTROL: C.F.O.S. Construction Financial Operating System.
Is this normal for my trade?
Across the 48 trades that publish a figure, net profit at $1M to $5M averages 7% before taxes. If you're well under that and this page describes your month, the two are usually the same story. The published average tells you where the pack is, and your own job costing tells you where you are, which is the number that pays payroll.
Where do I start?
List every open PO and subcontract by job, with the amount, the amount billed and the amount remaining, and check that each is tied to a cost code.
What is a committed cost?
It's money you've agreed to spend through a signed PO or subcontract that hasn't yet been billed and posted. It isn't an expense yet, but it will be. Tracking it tells you what the job will cost, not just what it has cost.
Why isn't committed cost in my job cost report?
Because the books record cost when the bill is entered, not when the PO is issued. Unless your process adds POs up outside the books, the report only looks at the past. That makes the job look better than the job really is until the invoices catch up.
Who should own committed cost tracking?
The PM owns the commitments, and the controller reviews them each month. What was ordered and what's still coming is the PM's knowledge. Then the controller checks that the numbers tie to the PO list and the cost to complete before the month closes.
Can I fix this without touching anything else?
You can try, and it doesn't hold. Step 07 depends on step 03, overhead calculation and step 04, estimating system and step 05, software and bookkeeping alignment and step 06, project management. Install it ahead of those and it produces numbers the field won't trust, which is worse than the problem you started with.
Wrote CONTROL, the 8 step system behind these figures. More about the author.