Engineering EOM Reporting - Types of Costs and Reading an Accounting Export
We never studied accounting, yet here we are—entering dockets, approving invoices, and forecasting costs.
If you're a civil project engineer, chances are you've found yourself knee-deep in financial data, wondering what all the accounting jargon means and why it matters. After learning about bending moment diagrams and soil analysis for 4 years, we are looking at an export from accounting software and deciphering what is an incurred vs actual cost, and why all your dockets are positive one month and negative the next.
The default way to learn, is to just figure it out as you go, and learn from your many mistakes. The purpose of this article is to aid the learning curve by breaking down some key definitions, terminology and concepts.
Cost to Date Reports
Most accounting software (Jobpac, vista, etc.) has a function where the details cost to date can be exports (usually into excel). Typically, this export will be produced per project for the end of month reporting.
These reports will include actual costs, invoiced costs, and accrued costs. These are defined further down.
These reports are presented in a typical accounting ledger format. This is an accounting term, and thus these reports following accounting rules (or Generally Accepted Accounting Practices (GAAP)). The primary example of such a practice, that is destine to confuse the hell out of Engineers, is that an entry into the ledger cannot be edited once posted. Instead it must be “reversed out” leading to “negative entries”. This is discussed further down.
Types of Costs
Every cost on a project started off as an incurred cost, and follows the process of becoming accrued, invoiced, and once paid, it finally becomes an actual cost.
This terminology is very important to understand because it can tell you allot about your cost to date reports.
Incurred Cost
The second we undertake an activity for which we will have to pay for, the cost of that activity is said to be “incurred”. An example would be the grader and operator that has worked a 10hr day on the project. Although, no money has yet been exchanged, the service has been rendered and thus, the cost of that day’s work has been “incurred”.
Accrued Cost
When trying to understand your financial performance to date on a project, you must compare the value of work you have performed versus the total cost you have incurred. It would thus, be impractical to wait until an invoice has been received, or until the money has left the bank to pay the cost. Instead, our financial records, should as best as practical reflect the cost that has been incurred at any point in time.
For this reason, we “accrue” costs. Using the grader example above, the docket for the 10hrs of grader work would be entered into the accounting system as an accrued cost for that day’s work. Thus, the cost to date would reflect the incurred costs due to the accruals entered prior to an invoice being received.
Docket entry is a typical example of an accrued costs, and most accounting software refers to this as a specific type of accrual for clarity. However, it is also common to enter a single line accrual for a subcontractor that is paid by scope, based on an assessment of the works complete for the period. An example here might be accruing the works completed by the piling subcontractor for the month.
Invoiced Cost
This is as simple as it sounds. This is a cost where an invoice has been received. Presumably, every incurred cost will eventually be invoiced (assuming the party performing the works intends to get paid). Salaries and wages are a notable exception. These are paid through Payroll and do not require an invoice. The accrual is merely a temporary measure to account for the incurred cost prior to it being invoiced.
Actual Cost
This is the money that has actually left the account. It includes paid invoices, wages, and any other settled expenses. For an Engineer’s EOM Reporting purposes, you will rarely need to know when the money actually leaves the bank accounts and thus, when an invoiced cost becomes an ‘actual cost’.
What do the cost types tell us?
Invoiced and actual costs have more certainty than just accrued costs. A high proportion of accrued costs vs invoiced costs may indicate a risk to the accuracy of the reported Cost to Date
Accrued costs that haven’t been invoiced for some time generally need to be reviewed to see whether they are still valid. This could result in their elimination and thus a reduction in the reported Cost to Date
Accrued costs for the month may be less than the typical monthly invoice, implying some incurred costs may not have been accrued (e.g. dockets not entered)
Ultimately, it is another data point, and thus, an opportunity to sanity check the data as a whole.
Negative Entries in a Cost Report
As mentioned above, accounting software typically reports your costs to date in an accounting format. This means that line entries cannot be edited or deleted. Instead they must be corrected by subsequent additional line.
This is often one of the most confusing aspects of reading exports from accounting software to assess costs.
When dockets are entered in accounting software, they are a type of accrual (usually called docket entry or similar) that accrue the cost in the accounting software until the invoice is received. Once the invoice is received, the dockets are matched to the invoice, and the invoice can be entered and the dockets removed from the ledger. However, in the world of accounting, you cannot simply delete something entered into the ledger. Instead it must be “reversed out“. This is where the invoice is added alongside negative entries for each of the docket entries.
For example, when an invoice is received corresponding to 20 dockets. The total amount of entries in the sheet will be equal to 41 (20 docket positive entries, 1 invoice entry, and 20 negative docket entries).
The same is true when a cost changes cost code. The cost must be reversed out and re-entered in the correct cost code.
Why It Matters
We deal heavily in costs as engineers. We are heavily integrated with the world of accounting. We collect dockets which are entered into accounting software, we receive cost to date summaries which come from accounting software, and after we complete our EOM reports, we send the data back to our accounts to be put back into our accounting software.
Despite this integration, we often have no formal or even informal training in accountancy.
