Committed Cost

A committed cost is an expense that a business has formally agreed to pay but which has not yet appeared in its accounts as an actual cost. Commitment typically arises when a contract is signed, a purchase order is raised, or a change order is approved. Even though no invoice has been received and no payment made, the cash is spoken for. The distinction matters because a project or job that looks on budget when measured only against invoices received can be significantly over budget once committed costs are included.

How Committed Costs Arise in Practice

Committed costs are created at the moment of obligation, not at the moment of invoice. A signed subcontract for £40,000 creates a committed cost of £40,000 on the day it is executed. A purchase order for materials commits the value of that order even if the goods have not yet been delivered. An approved variation to an existing subcontract creates an additional committed cost from the point of approval.

In a typical project or job, committed costs fall into several categories. Subcontractor agreements represent the largest category for most construction and trade businesses. Material purchase orders commit costs as soon as they are placed, sometimes weeks before delivery. Plant hire agreements commit a daily or weekly rate over the hire period. Where change orders have been approved but not yet billed, those amounts are committed even if they have not yet appeared on a supplier invoice.

Why Committed Cost Tracking Matters

Monitoring only actual costs creates a dangerous lag between what a business has promised to spend and what shows up in its books. A job that appears to have £10,000 of budget remaining when measured against actual costs may have no room at all once committed purchase orders and subcontract obligations are counted. Discovering a budget problem at invoice stage is too late to act on it - the spending decision was made weeks or months earlier when the commitment was created.

Tracking committed costs gives the commercial team real-time visibility into where a job or project stands financially, regardless of where invoices are in the pipeline. It is particularly important when managing multiple jobs simultaneously, where it is easy to lose track of outstanding purchase orders and subcontract agreements across the whole business.

How Committed Costs Flow Through a Business

Committed costs change as the job progresses. When a purchase order is raised and goods are delivered, the committed cost converts to an actual cost recorded against a supplier invoice. When a subcontractor applies for payment and an invoice is approved, the relevant portion of their committed contract value becomes an actual cost. The remaining committed portion reduces accordingly.

Managing committed costs effectively means recording obligations at the point they are created - when the purchase order is raised or the subcontract is signed - rather than waiting for the invoice to arrive. Zigaflow links purchase orders and subcontract agreements to jobs, giving the commercial team a view of job spend that includes both actual and outstanding committed costs.