Tracking Committed Costs in Construction Projects: A Step-by-Step Guide

In construction projects, managing costs can often feel like trying to keep track of sand slipping through your fingers. However, understanding committed costs is key to avoiding nasty surprises at the end of a project.

This guide will walk you through everything you need to know about tracking committed costs, ensuring that your project stays on budget and on track.

What Are Committed Costs?

Committed costs are expenses your project has promised to pay but hasn’t yet been fully billed or paid for. Think of them as financial promises—money you’ve set aside for specific work, materials, or services. These include signed construction contracts, approved change orders, and purchase order. These costs are considered “committed” because they represent future payments you’re obligated to make.

Essentially, once you’ve committed to spending money, it counts as a committed cost—even if the invoice hasn’t hit your desk yet. For example, if you sign a contract to purchase $50,000 worth of materials, that amount becomes a committed cost. Even if the materials haven’t been delivered or paid for yet, the money is already spoken for.

If you want to explore other budgeting strategies, check out this Project Cost Management guide for more helpful tips.

How to Track Committed Costs

Tracking committed costs doesn’t have to feel overwhelming. By breaking it into simple, manageable steps, you can create a clear and effective system. Here’s how to get started and stay in control of your project finances:

Step 1. Start with the Contract

Every committed cost begins with a signed construction contract. You can’t track what you haven’t committed to, so the first step is to gather all signed contracts in one place. Keep a list of each contract's value, terms, and deadlines.

Step 2. Track Approved Change Orders

Change orders are inevitable in construction projects. Every time a change order is approved, it impacts your committed costs. Ensure that your project management software records each change and its financial implication.

Step 3. Log All Purchase Orders

Any materials, tools, or services ordered should be logged as a committed cost. Even if the supplier hasn’t been paid, the commitment has already been made.

Step 4. Monitor Subcontractor Agreement

Subcontractors often make up a large part of construction costs. Ensure that every subcontractor’s agreement, terms, and payments are accounted for. This will keep committed costs updated.

Step 5. Use Project Cost Management Software

Invest in a tool that can automatically track your committed costs. A solid project cost management system will do most of the work for you, ensuring nothing falls through the cracks.

Pro tip: Mastt is a great choice for keeping everything organized.

Step 6. Review Regularly

Construction projects are constantly changing. Schedule regular reviews of your committed costs so that you always have a handle on the project's financial state. As a wise person once said, "Ignorance is bliss—but not when it comes to project budgets!"

Why Tracking Committed Costs is Essential

Tracking committed costs gives you a clear picture of your project’s financial health. Without it, you might overspend without realizing how much money is already allocated. And let’s face it, knowing where the money is going is better than playing the guessing game later on.

Let’s break down why this practice is so important.

Risk Mitigation

A study by the Construction Financial Management Association (CFMA) found that 1 in 3 construction projects exceed their program budget. And, one of the most common reasons for budget overruns is failing to account for all committed costs. These are the costs you’ve already promised to pay, such as signed contracts or purchase orders. Without tracking them, you risk overspending before realizing it.

Manage Cash Flow Effectively

Cash flow issues are a silent killer for construction projects. Even if you’re under budget, poor cash flow can delay progress, halt operations, and increase stress. Tracking committed costs allows you to predict when payments are due and plan your spending.

Learn more about how cost control trends can impact committed costs in your project.

Enhance Stakeholder Confidence

Projects are often funded or overseen by stakeholders who need reassurance that their money is being spent wisely. Accurate committed cost tracking shows them that you’re on top of things.

Avoiding Pitfalls

Tracking committed costs sounds simple enough, but common pitfalls can throw even the best project managers off course. Here’s how to dodge them:

• Failure to update regularly. Committed costs can fluctuate. If you’re not updating your data regularly, you’ll be flying blind.
• Ignoring small costs. Little costs add up. Don’t assume small committed costs are insignificant.
• No clear approval process for change orders. Without a defined process, things can get lost in the shuffle, impacting your budget.

Learn more about how a well-structured cost management plan can help prevent these issues.

Conclusion

Mastering the art of tracking committed costs can be the difference between a successful project and a financial nightmare. Start with the basics—signed construction contracts and approved change orders—and keep an eye on all your commitments. With the right tools and regular updates, you’ll avoid budget headaches and be the hero of your construction project. And remember, construction budgets are like diets: you have to track everything, or you won’t see results!