The definition
| Stage | What it is | Where it shows |
|---|---|---|
| Budget | What the estimate said the cost code would cost | Job cost report, original and revised |
| Pre-encumbered (planned) | An approved requisition that has not become a purchase order | Planning exposure beside the job; not a floor on the forecast |
| Committed (encumbered) | An issued purchase order or subcontract, less what has been invoiced against it | Open commitments on the job; a floor on cost to complete |
| Actual (incurred) | Invoices, pay applications, labor and other posted cost | Cost to date; the only stage that reaches the GAAP statements |
| Estimated cost to complete | The PM’s estimate of everything still to spend, at least the open commitments | The approved forecast |
The usual presentation is budget, committed, actual, and committed plus actual against budget. A cost code with $100,000 budget, $60,000 actual and $50,000 still open on a subcontract is already $10,000 over, even though actual cost is under budget. That is the number a job cost report should make impossible to miss.
How it moves
- A purchase order or subcontract is approved: committed cost increases by its value
- A vendor invoice or subcontractor pay application is certified against it: committed decreases and actual increases by the same amount
- A change order to the commitment is approved: committed increases or decreases by the change
- The commitment is closed out: any unbilled balance is released and committed decreases
Committed cost only works when every commitment is issued through the system before the work starts. A subcontract written in Word and filed in a folder is invisible to the job until the first pay application arrives, at which point it appears as actual cost with no warning.
Why it matters
- Forecasting: cost to complete for a cost code cannot be less than its open commitments; a forecast that ignores them is wrong
- Buyout: budget less committed by cost code is the buyout gain or loss, visible as soon as the subcontract is issued rather than at job end
- Cash planning: open commitments are the payables of the next few months
- Closeout: a job cannot be closed with open commitments; they must be invoiced, released or reassigned
How Forge ERP handles committed cost
Forge keeps the commitment stages separate: approved requisitions post as pre-encumbrances, approved purchase orders and subcontracts post as binding encumbrances, and invoices and pay applications post as actual cost, with each stage shown as of a date on the project ledger. Total commitment exposure is pre-encumbered plus encumbered. Only posted actual cost reaches the financial statements. A forecast’s cost to complete cannot be set below open binding encumbrances, and project closeout is refused while posted encumbrances or approved requisitions remain.
Forge ERP covers projects, purchasing, accounts payable, billing and receivables, job cost and WIP, reporting and close. Payroll runs in your payroll provider and lands in Forge as job-costed labor with burden. Forge is in beta with a 14-day free trial.
Frequently asked
- Is committed cost a liability?
- No. Under GAAP a liability arises when goods or services are received. An open purchase order or subcontract is an executory contract: a commitment, disclosed in some cases, but not booked. It is tracked in job cost as budgetary control, not in the general ledger as a payable.
- What is the difference between committed cost and cost to complete?
- Committed cost is contracted and unbilled. Cost to complete is everything still to be spent, including commitments, self-performed work, and costs with no contract yet. Cost to complete should never be below committed cost.
- Should change orders to subcontracts be included?
- Yes, once approved. A subcontract change order changes the commitment the day it is approved, which is also when the matching cost should appear in the forecast.