Why jobs report well until they do not

An accrual is cost that has been incurred but not yet invoiced. The subcontractor worked in March and invoices in April. The materials were delivered on the twenty-eighth and the invoice arrives in the second week of the following month.

If March’s cost is taken as March’s invoices, March looks cheaper than it was. The cost has not gone away; it has been moved into April, where it will sit alongside April’s own costs and make April look expensive for no visible reason.

The pattern this produces

On a job reporting monthly, the effect is not random. Cost consistently lags value by two to four weeks, which means every single period reports a margin that is too high, by roughly one month of cost.

That continues until the job winds down. In the final months value stops but the invoices keep arriving, and the accumulated understatement lands in one or two periods.

What has to be accrued

• Subcontract work done but not yet applied for or certified.
• Materials delivered and not yet invoiced.
• Plant on hire for the period, where the hire invoice runs to a different date.
• Labour worked in the period but paid in the next.
• Staff costs, insurances and preliminaries that are billed quarterly but consumed monthly.

How to build one quickly

Take the subcontract certificates issued to the cut-off, add the value of work known to have been done since, take delivery notes without matching invoices, and add a proportion of any periodic cost. Fifteen minutes on most jobs.

Precision matters less than consistency. An accrual estimated the same way every month gives a margin trend that is meaningful even if the absolute figure moves a little. An accrual done in some months and not others gives a trend that is noise.

The organisational reason it gets skipped

Because it makes this month look worse, and nobody is rewarded for that. The incentive at every level is to report the number that came out of the ledger and let next month worry about next month.

Which works for a while. It stops working in the month somebody asks why the margin halved, and the honest answer is that it did not halve, it was always this and the reporting was wrong.

The check

Compare the cost accrued last month against the invoices that actually arrived this month. If the accrual was consistently close, the process is working. If it was consistently low, every margin reported this year has been too high.