Budgets, commitments and cost control

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Budgets, commitments and cost control

9 chapters · about 8 min · full transcript

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Chapter 1 of 9

Money committed is money gone

Budget, commitment, actual cost, accrual
The commitment view as early warning
Contingency drawdown with a log

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0:00 Money committed is money gone

Picture this. A control account manager proudly reports that she's spent only four hundred thousand of a one point two million budget. Everything looks fine. But she's already signed purchase orders and subcontracts worth nine hundred and fifty thousand, and there's still three hundred thousand of buying to do. The overrun is already locked in. It just hasn't been invoiced yet. In this lecture you'll learn the vocabulary of project cost, why cash paid is not actual cost, how the commitment view gives you early warning, the monthly cost control routine, and how to manage contingency with a proper log. By the end you'll be able to spot a cost overrun before a single extra pound is spent.

0:51 Why it matters

Why does this matter? Because cost control fails most often not through bad maths but through bad vocabulary. The finance team says 'cost' and means cash paid. The site team says 'cost' and means what's been ordered. The controls team says 'cost' and means cost incurred for work performed. Three people, one word, three numbers. Then the monthly report becomes an argument. So the first job in cost control is to fix the language and make sure everyone uses it the same way. The second job is timing. Cash lags cost, sometimes by months, and if you measure performance with cash you'll get the wrong answer. And the third is foresight: commitments tell you where cost is heading long before invoices arrive.

1:44 The concept: the vocabulary

Here are the terms. Budget at completion, BAC, is the total approved budget for the work in the baseline. A commitment is money contractually committed but not yet spent: purchase orders and signed subcontracts. Actual cost is cost incurred for work performed in the period, recognised from invoices, timesheets and accruals. An accrual is cost for work done that hasn't been invoiced yet. Estimate to complete, ETC, is the expected cost of the remaining work. Estimate at completion, EAC, is actual cost plus ETC. And variance at completion is BAC minus EAC. Here's the analogy I like. Think of a restaurant bill at a big group dinner. The budget is what you agreed to spend. The commitment is everything you've ordered. The actual cost is what's already been eaten. You don't wait for the bill to know you've overspent.

2:44 Worked example one: cash versus cost

Let's make this concrete with the example from the lesson. Najd Build, a fictional firm in Riyadh, is three months into a school project. Finance reports six hundred thousand paid. The controls analyst digs in. There's one hundred and eighty thousand of completed work not yet invoiced. That's an accrual, so it's added. There's also a fifty thousand prepayment for equipment that hasn't been delivered. The work hasn't been performed, so it's taken out. True actual cost for the period: six hundred plus one eighty minus fifty. Seven hundred and thirty thousand. That's more than twenty per cent higher than the cash figure. Without the adjustment, month three looks cheap, earned value looks better than reality, and the surprise lands two months later when the invoices catch up.

3:40 Worked example two: the commitment view

Now the realistic scenario. Control account one point four, building services, on a procurement-heavy project, with illustrative numbers. Budget: one point two million. Signed purchase orders and subcontracts: nine hundred and fifty thousand. Remaining to buy, estimated from current quotes: three hundred and thirty thousand. Add those together and the forecast commitment total is one point two eight million. Eighty thousand over budget. And actual cost to date? Only four hundred and ten thousand. If you only watched actuals against budget, this account would look healthy for months. The commitment view shows the overrun before a single extra dollar is spent, while there's still time to value-engineer the remaining packages, negotiate, or raise it formally. That's where controls earns its keep.

4:33 Watch me do it: commitment tracker and contingency log

Let me show you the two sheets I'd set up on day one. The first is a commitment tracker, one row per control account: budget, committed, remaining to commit, forecast commitment total, and a variance column that's simply committed plus remaining minus budget. Anything positive turns red. The second is a contingency log. Every drawdown gets a row: date, the risk ID it relates to, the event, the amount, who approved it and what remains. So on the twelfth of March we drew forty-five thousand for unforeseen rock, risk fourteen, approved by the project manager. Then a cell at the top compares remaining contingency with the remaining risk exposure from the register. Right now, two hundred and twenty-five thousand remaining against three hundred and ten thousand of exposure. That's not a crisis yet, but it's an escalation, and it goes in this month's report.

5:36 Contingency and regional realities

Two more practical points before we look at the mistakes. First, contingency. It isn't a slush fund for anything that goes wrong. Every drawdown should reference a specific risk and an approval. And each month, compare remaining contingency with remaining risk exposure. If exposure exceeds what's left, escalate now, not when it runs out. Second, regional realities. Multi-currency projects, like imported equipment into Pakistan or Saudi Arabia priced in dollars or euros, need a clear exchange-rate policy for both budget and forecast. Inflation and escalation clauses should be modelled explicitly rather than hidden in contingency. And tax, whether that's VAT in the UAE, Saudi Arabia and the UK or sales tax in Pakistan and the US, should follow your finance policy consistently. Decide whether reports are gross or net of recoverable tax, and say so on every page.

6:36 The monthly routine and common mistakes

Here's the monthly routine. Close the period: collect actuals, post accruals and reconcile to the finance ledger. Update commitments and remaining-to-commit estimates. Update progress. Calculate variances and indices. Review each control account with its manager and update the estimate to complete. Consolidate the EAC and compare it with the budget plus contingency. And record the decisions, drawing contingency only through approved decisions. The common mistakes follow naturally. Reporting cash paid instead of cost incurred. Ignoring commitments until invoices arrive. Moving budget between control accounts without a change record. Spending contingency without linking it to a risk. And cost codes that don't match the WBS, so someone reallocates everything by hand every month.

7:25 Recap and try this now

To recap. Fix the vocabulary so everyone means the same thing by budget, commitment, actual cost and forecast. Measure cost incurred, including accruals, never simply cash paid. Use the commitment view as your early warning system on anything procurement-heavy. Run the same monthly routine every period, and treat contingency as a controlled reserve linked to specific risks, not a slush fund. Before you close any period, ask yourself whether an auditor could trace every actual cost to an invoice, timesheet or documented accrual. Here's your try-this-now. For a project you know, list the top three control accounts and fill in budget, committed, remaining to commit and forecast commitment total. Which one is heading over budget, and what would you do about it this month?

The language of project cost

Cost control fails most often because people use the same word for different things. Fix the vocabulary first.

Term	Meaning
Budget at completion (BAC)	Total approved budget for the work in the baseline
Commitment	Money contractually committed but not yet spent (purchase orders, signed subcontracts)
Actual cost (AC)	Cost incurred for work performed, recognised in the period (invoices, timesheets, accruals)
Accrual	Cost for work performed but not yet invoiced
Estimate to complete (ETC)	Expected cost of the remaining work
Estimate at completion (EAC)	AC + ETC: expected total cost
Variance at completion (VAC)	BAC − EAC

A frequent error is treating cash paid as actual cost. If a subcontractor completed $200k of work in March but invoices in May, March's actual cost should include a $200k accrual. Without it, March looks cheaper than reality and earned value metrics become misleading.

From estimate to cost baseline

Estimate each work package (labour, materials, equipment, subcontracts, indirects).
Add contingency for identified risks based on risk analysis, held in a visible line.
Time-phase the budget by loading work-package costs onto schedule activities.
Approve the cost baseline and lock it as a version.
Set up cost codes that match the WBS so actuals land in the right bucket.

The commitment view

In procurement-heavy projects (construction, energy, infrastructure), the commitment view is a powerful early warning. Compare for each control account:

Control account: 1.4 MEP systems             (illustrative, USD)
Budget (BAC)                        1,200,000
Committed (signed POs/subcontracts)   950,000
Remaining to commit (estimated)       330,000
Forecast commitment total           1,280,000   -> 80,000 over budget
Actual cost to date                   410,000

The overrun is visible before a single extra dollar is spent, because the forecast commitment total exceeds budget. This is where controls earns its keep.

Cost control routine (monthly)

Close the period: collect actuals, post accruals, reconcile to finance.
Update commitments and remaining-to-commit estimates.
Update progress (see earned value lessons).
Calculate variances and indices.
Review each control account with its manager: explain variances, update ETC.
Consolidate EAC and compare to BAC + contingency.
Record actions and decisions; draw down contingency only through approved decisions.

Contingency drawdown

Contingency is not a slush fund. A healthy practice is a contingency log:

Date	Risk ID	Event	Amount drawn	Approved by	Remaining
12-Mar	R-014	Unforeseen rock during excavation	45,000	PM	255,000
03-May	R-022	Currency movement on imported switchgear	30,000	PM + Sponsor	225,000

Compare remaining contingency to remaining risk exposure (from the risk register or quantitative analysis). If exposure exceeds remaining contingency, escalate early.

Worked example: cash vs cost

Illustrative. Riyadh-based fictional firm Najd Build is three months into a school project. Finance reports $600k paid. The controls analyst finds $180k of completed work not yet invoiced and a $50k prepayment for equipment not yet delivered. True actual cost for the period is $600k + $180k − $50k = $730k. The difference changes the cost performance picture materially and would otherwise have surfaced as a nasty surprise two months later.

Regional and contract considerations

Multi-currency projects (e.g., imported equipment into Pakistan or KSA priced in USD or EUR) need a clear exchange-rate policy for the budget and for forecasts.
Inflation and escalation clauses should be modelled explicitly rather than hidden in contingency.
Tax treatments (such as VAT in the UAE, KSA and UK, or sales tax in Pakistan and the US) should follow your organisation's finance policy consistently; decide whether reports are gross or net of recoverable tax and say so on every report.

Common mistakes

Reporting cash paid instead of cost incurred.
Ignoring commitments until invoices arrive.
Budget transfers between control accounts without change records.
Spending contingency without linking it to a risk.
Cost codes that do not match the WBS, forcing manual reallocation every month.

Quick self-check

Before you close any period, ask yourself three questions. First, would an auditor be able to trace every actual-cost figure in this report to an invoice, timesheet or documented accrual? Second, does every control account's forecast commitment total compare cleanly with its budget, and have you explained any gap? Third, can you state the remaining contingency and the risks it is meant to cover in one sentence? If any answer is "not really", fix that before polishing charts. Cost control credibility is earned in these basics, and it is lost quickly when a sponsor finds a number that nobody can explain.

Hands-on: commitment tracker and contingency log in Excel

Commitment tracker (one row per control account):

A Control account | B Budget | C Committed | D Remaining to commit | E Actual to date
F Forecast commitment   =C2+D2
G Variance vs budget    =F2-B2              (positive = over)
H % committed           =C2/B2
I Flag                  =IF(G2>0,"OVER",IF(G2>-0.02*B2,"WATCH","OK"))

Contingency log (tab Contingency):

A Date | B Risk ID | C Event | D Amount drawn | E Approved by | F Remaining
F2   =Contingency_total-SUM($D$2:D2)
Exposure check  =IF(F_last < Remaining_exposure, "ESCALATE", "OK")

Remaining_exposure comes from the risk register (sum of probability × most-likely impact for open risks) or, better, from a quantitative analysis (for example P80 minus the base estimate). Link every drawdown to a risk ID; a drawdown without one is a budget transfer and belongs in change control.

Hands-on: an accrual check in Python

import pandas as pd

progress = pd.read_csv("progress.csv")   # control_account, period, value_of_work_done
invoices = pd.read_csv("invoices.csv")   # control_account, period, amount
m = progress.merge(invoices.groupby(["control_account", "period"], as_index=False)["amount"].sum(),
                   on=["control_account", "period"], how="left").fillna({"amount": 0})
m["possible_accrual"] = (m["value_of_work_done"] - m["amount"]).clip(lower=0)
print(m.sort_values("possible_accrual", ascending=False).head(10))

This does not replace the accrual process; it points the cost controller at accounts where work appears to have been done without matching cost.

How to measure success

Zero budget transfers without a change record.
Every contingency drawdown linked to a risk ID and an approver.
Commitment variances identified before the first overrun invoice arrives.

Actual cost is cost incurred for work performed, including accruals, not cash paid.
Commitments give an early warning of overruns before money is spent.
EAC = AC + ETC; VAC = BAC − EAC.
Draw down contingency only through a logged, approved decision linked to a risk.

For a project you know, list the top three control accounts and fill in budget, committed, remaining-to-commit and forecast commitment. Which one is heading over budget?

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Budgets, commitments and cost control