Financial Management: Budget vs. Actual
Budget, commitments, and earned value
Financial management tests whether you can explain a job's true position. Budget by cost code: labor, material, equipment, subcontract, indirect, and contingency. Total cost equals actual cost plus committed cost plus forecast remaining cost. Committed cost includes purchase orders and subcontracts even if invoices have not arrived. Measure percent complete by installed units, not by dollars billed. Earned value equals budget times percent complete. Cost performance index equals earned value divided by actual cost. If the index is below 1.0, you are spending more than you earned. Forecast at completion equals budget at completion divided by the index when the trend is representative. Review over- and under-billing; billing ahead of cost hides a cash problem, and billing behind cost strains cash flow.
Variance and forecast discipline
Investigate variances by cost code, not just the total. A material credit can mask a labor overrun. Reconciled purchase orders prevent double counting. Do not move contingency into the budget to hide an overrun. Forecast cost-to-complete from demonstrated productivity and remaining quantities.
Worked example
A 10,000 sf job is budgeted at $25,000, or $2.50 per sf. At month end, 4,000 sf is installed: 40 percent complete. Earned value = $25,000 × 0.40 = $10,000. Actual cost to date = $11,500. Cost performance index = $10,000 ÷ $11,500 = 0.87. Forecast at completion = $25,000 ÷ 0.87 = $28,736. The projected overrun is $3,736. If committed remaining cost is $13,000, actual plus committed equals $24,500, which looks better than the index forecast; investigate whether the remaining commitment covers all work. Use the more reliable forecast, not the more comfortable one.
Traps that cost marks
- Using billed amount as percent complete.
- Ignoring committed cost until invoices arrive.
- Hiding overruns by releasing contingency.
- Comparing total cost only and missing a labor overrun.
- Billing ahead of installed work.
- Forgetting retainage and cash flow in the forecast.