Your project report says the job is profitable. But does it include everything you’ve already committed to spend?
Most builders review their projects by looking at actual costs incurred to date.
The problem is that actual costs only show where the project has been.
They don’t show where the project is heading.
That’s why one of the most overlooked numbers in construction is committed costs.
Understanding committed costs can be the difference between identifying a problem early and discovering you’ve lost money when the project is already complete.
What Are Committed Costs?
Committed costs are expenses that haven’t yet appeared in your accounting system but have effectively already been agreed to.
Examples include:
- Purchase orders issued to suppliers
- Signed subcontractor agreements
- Materials ordered but not yet invoiced
- Plant and equipment hire commitments
- Approved variations requiring additional work
- Labour already allocated to future stages
While the cash hasn’t left your account and the invoice may not have arrived, the business has already committed to spending the money.
For practical purposes, that cost already exists.
The Problem With Looking Only at Actual Costs
Let’s assume a project has:
- Contract value: $1,000,000
- Actual costs incurred: $500,000
On the surface, everything looks fine.
But what if you’ve already committed to another:
- $150,000 in materials
- $100,000 in subcontractors
- $75,000 in labour
Suddenly the financial picture looks very different.
If your reporting only focuses on actual costs, you’re making decisions with incomplete information.
Why Builders Get Caught Out
We regularly see projects that appear profitable halfway through construction but finish with disappointing margins.
Common reasons include:
Material Orders
Materials may have been ordered months earlier, but invoices are received progressively.
The committed cost exists long before it appears in the accounts.
Subcontractor Agreements
A builder may have locked in future trade packages that haven’t yet been invoiced.
Again, the liability exists even though it isn’t showing in current job costs.
Labour Requirements
Future labour is often underestimated because managers focus on money already spent rather than what remains to finish the project.
Variations and Scope Changes
Additional work can significantly increase future costs if variations aren’t carefully tracked and included in forecasts.
The Missing Link Between Actual Costs and Forecasting
Many builders understand:
- Actual costs
- Budgeted costs
- Work in Progress (WIP)
Fewer builders actively monitor committed costs.
This creates a blind spot.
To properly forecast the final outcome of a project, builders need to understand:
Actual costs to date + Open committed costs + Forecast uncommitted costs to complete = Forecast final cost
For example:
- Actual costs incurred: $500,000
- Open committed costs: $250,000
- Forecast uncommitted costs to complete: $150,000
Forecast final cost: $900,000
This provides a far more realistic picture than simply looking at costs already incurred.
Importantly, committed costs should only include commitments that have not already been recorded as actual costs. Otherwise, the same cost can be counted twice.
Without committed costs, forecasting becomes little more than an educated guess.
Why Committed Costs Matter for Cash Flow
Committed costs affect more than project profitability.
They have a direct impact on future cash requirements.
A project may appear healthy today because the bank balance is strong.
However, if significant commitments are due over the next four to eight weeks, cash can disappear quickly.
Builders who understand their committed cost position are far less likely to experience unexpected cash flow pressure.
The Best Builders Focus on Where the Project Will Finish
Successful builders don’t simply ask:
“What have we spent?”
They ask:
“Knowing what we know today, what will this project cost to complete?”
That shift in thinking changes the quality of decision-making dramatically.
It allows project teams to:
- Identify margin erosion early
- Take corrective action sooner
- Manage cash flow more effectively
- Improve forecasting accuracy
- Reduce project surprises
A Better Monthly Project Review
For every active project, builders should review:
- Original contract value
- Approved variations
- Actual costs incurred
- Open committed costs
- Forecast uncommitted costs to complete
- Forecast final cost
- Forecast final margin
- Key project risks
Looking at these numbers together provides a far clearer picture of project performance than reviewing historical costs alone.
Why This Matters More Than Ever
In today’s construction environment, project margins are under constant pressure.
Material prices shift.
Labour shortages impact productivity.
Subcontractor rates increase.
Projects run longer than expected.
The builders who consistently protect margins are not necessarily the builders who estimate best.
They’re the builders who forecast best.
They understand not just what has happened, but what is still committed and what remains to be spent.
Final Thoughts
Actual costs tell you where a project has been.
Committed costs help reveal where it’s going.
Builders who only rely on actual costs often discover profit issues too late to do anything about them.
By including committed costs in your monthly project reviews, you’ll gain a more accurate understanding of future profitability, future cash flow demands and overall project health.
Because in construction, it’s not the costs you’ve already incurred that create surprises.
It’s the costs you’ve already committed to but haven’t yet recognised.
