Categorizing and Calculating Actual Project Costs, Explained

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Categorizing and Calculating Actual Project Costs

Project Management · Chapter 9: Project Monitoring, Control, and Performance ManagementSection 9.3 · lesson 57 of 7317 min · free with a free account

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In this lesson

Counting incurred costs, coding them, and reconciling project and finance records.

  • Distinguish committed, incurred and paid cost, and calculate actual cost to date
  • Apply accruals, period cut-off and cost coding to project cost entries
  • Reconcile project and accounting records by explaining timing and coding differences
  • Explain why sunk costs should not drive a decision to continue or stop

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Transcript

Everything said in the video, section by section (1,995 words). Read along, or search it.

Opening Case

Two Records, Two Different Totals

It's March 31 on a waiting-room refit at one of Willowbrook's clinics, and Priya needs the actual cost to date. The figures here are made up. Her team's project record says $9,500. Finance's ledger says $8,090. They can't both be right. By the end of this lesson, you'll know which entries count, and you'll see both records agree on a third number.

Definition

Actual Cost Needs a Status Date

Actual cost is the cost of the work performed up to a stated date, recorded from source documents, so it can be compared with the budget at the same date. The budget is the approved plan for what the work should cost. A forecast estimates what it will cost from here on. Actual cost records what has already happened. So it always needs a status date, and a rule for which entries count.

Cost States

Committed, Incurred and Paid

One purchase passes through three states. A purchase order to a supplier creates committed cost: money promised, for goods not yet received. When the goods arrive, or the service is done, it becomes incurred cost, whether or not an invoice has arrived. When the invoice is settled, it's also paid cost. Labor usually skips the first state: hours worked are incurred, with no order. Here's the rule for this whole lesson. Actual cost to date is the sum of incurred and paid entries, dated on or before the status date. Paid entries were incurred first, so they're not added twice. Committed cost is listed as a memo, never added. And paid alone is a cash view, reported separately. A deposit, paid before delivery, is cash out without incurred cost. If a project pays deposits, it needs a written rule for them.

Worked Example

Following One Cabling Purchase

Follow one purchase: cabling for $2,400. Ordered on March 3, it's committed. Delivered and installed on March 12, it's incurred. Paid on March 27, under fifteen-day terms. Each date answers a different question: when money was promised, when the work was done, and when cash left. Actual cost counts it from March 12. Counting only when paid would show none of it until the 27th, although the cabling was already in the walls. Meanwhile, the project team entered the delivery on March 13, from the delivery note. Finance entered it on March 20, when the invoice was processed.

Accruals and Cut-Off

Recording Costs in the Period Used

That's the idea behind an accrual: a cost recorded in the period the goods or services were received or used, even before the invoice arrives or is paid. Floor tiles delivered on March 20 are used in March, though the invoice may be settled in April. As incurred cost, they're March. As cash, April. Neither is an error. They answer different questions, and a mismatch usually means two people used different counts without saying so. A cut-off is the rule that decides which period an entry belongs to, usually by delivery or performance date, not recording date. Use the same cut-off in both records.

Cost Coding

WBS Element, Cost Account and Phase

To compare actual cost with the budget, each entry needs coding: identifiers saying where in the project it belongs. A WBS element, the deliverable or work package. A cost account, like labor, materials, subcontract or equipment hire. And a phase, like strip-out, installation or finishing. The refit has four elements: 1.1 site management, 2.1 strip-out, 2.2 electrical, and 2.3 finishes. The cabling's code reads: 2.2, materials, installation. Record cost at the level the budget is held. Code at the source, from an agreed list, and split shared charges by a recorded rule, like hours. Mis-coding does damage the total hides. Move $900 of ceiling work into strip-out, and the total stays the same, but strip-out looks over budget and finishes under.

Labor Costs

Timesheet Hours Times Rates

Labor is often the largest cost, and no invoice announces it. A timesheet records the hours a person worked, by task code, approved by a supervisor. A rate table is the controlled list of hourly cost rates. Labor cost equals hours worked times the rate: here, $18 an hour for strip-out crew, $30 for the electrical lead. A missing or late timesheet understates actual cost. The labor line looks flat, then jumps when the sheet arrives, so the saving was false. The electrical lead works 8 hours on March 30, but the sheet arrives April 2. That's 8 x $30 = $240, incurred in March. Post it back to March if that period is still open, or as a dated adjustment if not. And a wrong rate misstates every hour: the figures look tidy, and are wrong.

Worked Example

The Refit's Project Record at March 31

Now the refit's project record at March 31. Each entry has a code, a state and an amount. Tiles delivered, $1,500, incurred. Light fittings ordered, $1,600, committed. Glass partitions ordered, $3,000, committed. The cabling, $2,400, now paid. Plastering, stage one complete, $2,000, incurred, though unpaid. Strip-out crew, 100 hours at $18: $1,800. Electrical lead, 40 hours at $30: $1,200. And site cabin rent for March, $600, incurred. Strike the two orders, and add only the incurred and paid entries. That's $9,500, the team's figure.

Cross-Checks

Totals by Type, State and Element

Step by step. Labor is 1,800 plus 1,200: $3,000. Materials, the cabling and the tiles: $3,900. Add the plastering invoice, $2,000, and the cabin, $600. Total: $9,500. The two orders, 1,600 plus 3,000, make $4,600. They stay out as a memo. Adding them gives $14,100: exposure, not cost incurred. Cross-check by state. Incurred-only entries come to $7,100, and the paid entry is $2,400. Together, $9,500. The cash view alone is just $2,400. By element: site 600, strip-out 1,800, electrical 3,600, and finishes 3,500. Those also sum to $9,500, so each element can be compared with its own budget.

Quick Check

Actual Cost on a June Fit-Out

Quick check, on a different fit-out, with a status date of June 30. Joinery labor, $1,200, incurred. Pipes delivered and paid, $1,100. Basins ordered, $900. Fencing hire for June, $400, incurred. Is actual cost to date $1,100, $2,700, or $3,600? Pause and predict. $2,700. Add the incurred and paid entries: $1,200 + $1,100 + $400. The basins are only ordered: a memo. Adding them gives $3,600, which is exposure. And $1,100 is the cash view, which leaves out work already done.

Reconciliation

Timing Differences and Coding Differences

Now the gap. The project record is kept by the team, coded to the work breakdown, for control. The accounting record is finance's ledger, for payment and wider reporting. Reconciliation compares two records, explains every difference, and records adjustments until they agree. Here, the difference is 9,500 minus 8,090: $1,410. A timing difference: an entry belongs in the period, but one record entered it later. A coding difference: it's charged to the wrong project, element or account. An adjustment is a new, dated, documented entry. The original entries aren't erased, so the audit trail survives.

Worked Example

Explaining the Gap Between Records

Three items explain the $1,410. First, the plastering invoice, $2,000, reached the team on March 29, but finance entered it on April 2. That's timing: finance adds $2,000, dated March. Second, an electrical timesheet, 8 hours at $30, so $240, went to payroll on March 31, but reached the team on April 2. Timing again: the team adds $240. Third, finance carries a scaffold hire charge of $350, whose hire form names another project. That's coding: finance removes it, and re-posts it to the right project. The sign rule: an item only in the team's record raises the difference, and one only in finance's ledger lowers it. So 2,000, minus 240, minus 350, is $1,410. All of it is explained. The team's record becomes 9,500 plus 240: $9,740. Finance's becomes 8,090 plus 2,000, minus 350: also $9,740. They agree. Never absorb a leftover difference into some code to force agreement. Report it as unresolved. And reconcile by element too, since a coding error inside one project leaves the total unchanged.

Data Integrity

Four Faults and Their Controls

The agreed actual cost is $9,740. By element, that's 600, 1,800, 3,840 for electrical with the late timesheet, and 3,500. Records like these need data integrity: complete, accurate, authorized and unaltered, so they can be relied on. Four faults threaten it. An unauthorized charge, raised without authority to commit money. Controls: approval limits, separate people for ordering and approving, and matching each invoice to its order and delivery. A mis-coded charge, like the scaffold. Controls: a valid-code list from the work breakdown, coding at source, and sampling entries against documents. A duplicate. Enter the tile invoice twice, and $9,740 becomes $11,240, with no work behind it. Control: each document number appears once, and same-amount checks. And delayed recording, like the late timesheet. Controls: recording deadlines, and a period-end checklist of goods received but not invoiced, and timesheets not yet in.

Case Example

Nadia Reconciles Before Reporting

Here's a harder month-end, on an office renovation. Nadia, a cost analyst, finds the project record at $42,600, and the accounting record at $44,350. That's $1,750 apart, with the ledger higher. The renovation's manager asks her to send the lower figure to the client. Instead, she compares the records entry by entry. Electricians' timesheets, $450, are in payroll but not yet with the team: timing. A carpet delivery invoice, $900, is with finance only: timing too. A scaffold charge of $700 sits in finance's ledger, but its form names another job: coding. And the team holds a delivery receipt for $300 that finance hasn't entered: timing. Net: 450 plus 900 plus 700, minus 300, is $1,750. All explained. Both records come to $43,950, with the 700 flagged until the other manager confirms it. Without that confirmation, it would be $44,650. Nadia reports a day late, without the lower figure: a number needing correction costs more credibility than a short delay.

Sunk Costs

Past Spending and Forward Decisions

Last, a trap in using actual cost. A sunk cost is a cost already incurred that can't be recovered, whatever is decided next. It belongs in the record. The question is whether it should sway a decision to continue or stop. The forward-looking view compares only the cost and benefit still to come. Suppose a refit has spent $9,740, and finishing needs $6,000 more, for a space worth $5,000. Continuing leaves 5,000 minus 6,000: minus $1,000. Stopping leaves nothing further. The $9,740 is the same under both options, so it can't change the choice. A commitment that can't be canceled is in effect sunk; one that can be canceled is still a choice.

Two Views

Can Past Spending Ever Inform a Decision

Can past spending ever properly inform a decision? The strict view says no: it's identical across options, and treating it as a reason to continue produces escalation, spending more because much was spent. The other view says it can, in limited ways: as evidence of the real cost rate, as a signal of consequences of stopping, as an obligation to funders, or as a commitment device. The strict side replies that the first two are forward costs already counted, and the last two are about duty and self-control, not money. No side is taken here. Both agree a forward decision needs a forecast of the cost still to come.

Quick Check

Finishing the Signage Project

Quick check. A clinic signage project has spent $30,000. Finishing needs $8,000 more, for a result worth $10,000. Which numbers should decide whether to finish: $8,000 and $10,000, $30,000 and $10,000, or $38,000 and $10,000? Pause and predict. $8,000 and $10,000: the cost still to come, and the benefit still to gain. Finishing comes out $2,000 ahead, so the project should finish. The $30,000 is the same whether it finishes or stops. Adding it in, as $38,000, makes finishing look like a loss, and the project would stop for the wrong reason.

Case Resolved

Both Records Agree at the Same Total

Back to Priya's two numbers. $9,500 was the team's count, missing a late timesheet. $8,090 was finance's ledger, missing a late invoice and carrying another project's scaffold. Neither was the answer. After reconciliation, both records say $9,740, and that's the actual cost to date she can compare with the budget.

Key Takeaways

Count, Code, Reconcile and Look Forward

To recap. Actual cost to date is incurred plus paid entries, up to the status date. Committed cost is a memo, and paid alone is only a cash view. Code each entry to the level of the budget, so they can be compared. Reconcile records item by item, as timing or coding, with dated adjustments. And sunk costs don't decide the future: compare only what still differs.

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Project Management carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

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FAQ

Questions students ask us

About Categorizing and Calculating Actual Project Costs

What counts as actual cost to date on a project?
Actual cost to date is the sum of incurred and paid entries dated on or before the status date, with committed cost listed separately as a memo. If joinery labor of $1,200 is incurred, pipes worth $1,100 are delivered and paid, and fencing hire of $400 is incurred, actual cost is $2,700. A $900 order not yet delivered is only committed and stays out.
What is the difference between committed, incurred and paid cost?
Committed cost is money promised by a purchase order for goods not yet received. It becomes incurred when the goods arrive or the service is done, whether or not an invoice has arrived, and paid when the invoice is settled. Cabling ordered on March 3, installed on March 12 and paid on March 27 counts toward actual cost from March 12.
How do you reconcile project cost records with the finance ledger?
Reconciliation compares the two records, explains every difference as a timing or coding difference, and records dated adjustments until they agree. In one example, a $1,410 gap came from a $2,000 invoice finance had not yet entered, a $240 timesheet the team had not yet entered, and a $350 charge finance had coded to the wrong project. After adjustment, both records showed $9,740, and the original entries stayed for the audit trail.
What is an accrual in project cost tracking?
An accrual records a cost in the period the goods or services were received or used, even before the invoice arrives or is paid. Floor tiles delivered and used in March count as March incurred cost, though the invoice may be paid in April. A cut-off rule, usually based on delivery or performance date rather than recording date, decides the period and should match in both records.

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Project Management (Business 230) carries a NCCRS credit recommendation for 3 semester credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
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