Committed Costs, Purchase Orders & Subcontract Accounting

Welcome

Hello, and welcome. This is Super Structures General Contractors — a national general contractor headquartered in Powhatan, Virginia — here to help you and your clients build something that lasts. We're glad you're with us, and we look forward to connecting with you.

Alright, Committed Costs, Purchase Orders & Subcontract Accounting. Don't let the plain title fool you. Cut through everything, and it's this: Every subcontract and purchase order is a promise to spend — record the commitment the day it's made, pay against it only, and reconcile it to the penny at the end. Get comfortable here and you'll never be surprised by a sub's final invoice.

Costs are committed long before they're incurred. The day a $900,000 mechanical subcontract is signed, the job owes that money even though no invoice exists. Accounting systems built for construction track commitments so the forecast sees them.

Commitments

• Subcontracts — entered in the job cost system with their own schedule of values, retainage percentage, insurance requirements, and status.
• Purchase orders — material and equipment commitments with quantities and unit prices.
• Change orders to commitments — every sub change order updates the committed amount. The report that matters: budget vs. committed vs. invoiced vs. remaining to commit by cost code.

Subcontractor pay applications

Subs bill monthly against their schedule of values. The PM checks percent complete against work in place, accounting checks the math and the retainage, and the payment is released only with the required conditional lien waiver for the current payment and unconditional waiver for the prior one (forms vary by state). Second-tier waivers from the sub's suppliers protect the GC and the owner from liens.

Retainage payable

The retainage held from subs is a liability on the balance sheet and must match the subcontract terms. Release it when the contract allows — many states regulate how long it can be held after completion.

Back-charges

When the GC incurs cost on a sub's behalf — cleanup, damage repair, supplementing their labor — document it, notify the sub in writing, and record it as a back-charge against their contract. Undocumented back-charges don't get collected.

Going Deeper (Intermediate)

Three-way matching applies to construction: the invoice must match the PO or subcontract and the receipt or approved pay app. Invoices with no commitment behind them are a control failure and a budget surprise waiting to happen.

Watch joint checks (paying the sub and its supplier together) as a tool when a sub's supplier isn't getting paid, and know your state's prompt payment law — the GC usually has a set number of days after receiving the owner's payment to pay subs.

Advanced / Pro-Level

Pros run the committed-cost report as their primary forecasting tool: the budget minus commitments equals what's left to buy; remaining-to-commit plus commitments plus pending changes gives the forecast with no guesswork for bought-out scopes. They treat uncommitted budget as risk, especially late in a job.

They also run subcontractor default risk through accounting signals: a sub that bills ahead of work, that suddenly asks for joint checks, or whose supplier calls about payment is a default in progress. Accounting tells the PM; the PM acts under the subcontract.

Finally, year-end 1099 reporting for unincorporated subs, certified payroll on public work, and sales and use tax on materials by state are compliance items that live in this part of the system.

Practice Challenge

The mechanical sub's pay app #6 shows 70% complete on ductwork; the super says it's closer to 50%. The sub also hasn't provided the second-tier waiver from its sheet-metal supplier. What does accounting do? (Answer: the PM adjusts the pay app to the verified percent complete and notifies the sub; payment is held until the second-tier waiver is received — or is made by joint check to the supplier; the committed amount doesn't change, but the sub's billing pattern goes on the risk list.)

In Practice

A GC that records commitments on award knows the job has $180,000 left to buy. A GC that tracks only invoices thinks the job is under budget until the final sub invoices arrive.

Common Mistakes to Avoid

• Paying invoices with no commitment behind them
• Releasing payment without the matching lien waivers
• Retainage payable that doesn't reconcile to the subcontracts
• Back-charges tracked in someone's head instead of the system

Takeaway: Every subcontract and purchase order is a promise to spend — record the commitment the day it's made, pay against it only, and reconcile it to the penny at the end.

Educational content — not accounting, tax, or legal advice. Accounting methods and tax rules depend on your entity, your size, and your contracts; work with a CPA who knows construction.