Commitment

The moment a builder signs a subcontract or raises a purchase order, the money is effectively spent from the budget's point of view, even if no invoice arrives for months. That is a commitment.

Each commitment is coded to a cost code in the project budget. As the subcontractor claims and is paid, the commitment is drawn down into actual cost. Approved variations to the subcontract increase the commitment, and deductive variations or contra charges reduce it.

At any point a cost code can be read as: budget, committed value, actual cost to date and the uncommitted balance, which is the budget still free to spend on work that has not yet been let.

Commitments are what separate a cost report from a bank statement. Accounts payable only shows what has been invoiced, often weeks or months after the work was agreed. The commitment register shows what the project has signed up for today, which is the information a project manager needs to decide whether there is room in the budget for the next package or a site instruction.

Most builders include the following:

• Subcontracts. The agreed subcontract sum plus approved subcontract variations.

• Purchase orders. Orders for materials, hire and services.

• Plant and equipment hire. Dry or wet hire agreements for the expected hire period.

• Consultant agreements. Engineers, surveyors and other consultants engaged by the builder.

• Letters of intent. Where a letter of intent authorises work or orders up to a capped value before the full subcontract is signed.

Own labour and site overheads are usually forecast rather than committed, because there is no single contract behind them.

These three are often confused in cost reports.

A commitment is what you have agreed to pay. Actual cost is what has been invoiced, accrued or paid. Cost-to-complete is the forecast of everything still to be spent, including the unspent balance of commitments and the cost of packages not yet let.

A cost code can show actual cost well below commitment early in a package, and that is normal. The warning sign is commitment exceeding the budget for a code before the work is finished, or a large uncommitted balance late in the job.

• Not raising purchase orders. Site teams ordering by phone means costs appear only when the invoice lands, too late to manage.

• Forgetting subcontract variations. Approved variations that are not added to the commitment understate the true cost.

• Leaving closed commitments open. Unspent balances on finished packages make the forecast look worse than it is. Close them out.

• Coding to the wrong cost code. Misallocated commitments hide overruns in one trade behind savings in another.

Committing before approval. Purchase orders and subcontracts should be approved against the available budget before they go out, not reconciled afterwards.