Incurred Cost Management in Project Controls

Posted on Posted in Cost Control

Incurred Cost is a very important concept in cost control, progress measurement and earned value management.  In it’s most basic form, incurred relates to how much you have done up to and including a specified date (often the end of a reporting or progress monitoring period), and it could relate to cost, quantity and/or hours.

The incurred cost amount is made up of the amount that has been invoiced to date plus uninvoiced work (often called an accrual in accounting terms).  Sounds easy when you say it quickly! …. but this is one of the more difficult concepts to implement in the context of an overall project management system, and is almost impossible to determine accurately from a pure accounting system.

For the rest of this discussion, it is assumed that you have a good handle on your invoiced cost – if you don’t; stop now and get an accurate understanding of how much you have actually been invoiced. 

Ok …. assuming that we know what has been invoiced, it would be nice if we could link our estimate of incurred cost to real information that is obtained through our regular monitoring activities , rather than just guessing our accruals at the end of the month by the seat of the pants to form our estimate of incurred cost. The following is a list of some types of information that might enable us to estimate the incurred cost at any point in time.

  • Timesheets
  • Installed Quantity Reports
  • Physical % Complete

Timesheets and installed quantities can be multiplied by “gang” or consolidated commodity rates to form an estimate of the incurred cost associated with the work.  This can be useful for cost reimbursable, schedule of rates and time / materials contracts.  As long as this information is regularly reset and recalibrated by actual invoice information, it can help you keep a “bow-wave” of uninvoiced cost in next-to-real-time.  It is only limited by the discipline / ability to collect, collate, store and analyse the information.  This is a transactional approach to incurred cost management.

Another useful concept is physical % complete.  If we use the presumption that we will only pay for work that is physically complete, this can provide be a good measure of incurred cost.  However, beware that it does assume that you have a good understanding of what “complete” is.  There are many examples where this technique may have questionable benefit in estimating the incurred cost(eg. ground preparation in unsuitable ground, dayworks, commissioning etc. – you just need to keep going until you finish for these examples).

An important step that is often missed in incurred cost management using real field information is to match field information with invoice information when it is available.  This can be done by linking incurred information to invoices / progress claims when they come in and comparing the incurred estimate amount with the invoiced amount for the equivalent scope of work. 

This is the similar to “accrual reversals” in accounting terminology, with a key difference being that there is no need to “reverse” and reapply the same accrual each month if an invoice is not received.  Using this technique, we just keep adding new field information to previously collected information to keep a running total estimate of uninvoiced cost until an invoice is received to validate and reverse the estimate.

Using a combination of transactional incurred information, physical % complete and invoice matching yields a very powerful and robust incurred cost management system.  The incurred cost is incremented regularly on the basis of timesheets and installed quantities when they are signed off, then validated at defined intervals using the % complete technique, and finally replaced by the actual invoiced amount when it is received.  Any differences between the various techniques can be corrected by calibrating the rate information – and in any event, the uninvoiced estimate amount is only ever current for the length of time between invoices and should provide a better estimate of the incurred cost than simply plugging in accruals at the end of the month.