What is the best way to handle monthly accruals for ongoing time & materials maintenance construction project expenses?
Option 1: Try my best to estimate month-end costs and then explain the the cost/schedule/performance variance from my forecast in addition to the accrual/actual variance
Option 2: Wait until an invoice is received to accrue.
Background: I am managing spring/summer scheduled maintenance projects and have a maintenance contractor working for 6-7 months continuously. I can roughly project their monthly costs by the day rate of their personnel and equipment, but it is impossible to know the exact charges on the final day of a given month.
Our internal cost analysts / accountants really want me to accrue in the period the work occurred, but they are baffled that my accruals will be significantly different than the invoice (As a hypothetical, I'll do ~$200k of maintenance in a given month, so a rainout day or identification of equipment in bad shape can cause the invoice to be $20-30k different than what I accrue; I won't have the exact amount until early in the next month). I have tried to explain this to no avail.
If accurate cash flow is the driver for this information (not year- or quarter-end reports) I am recommending that my forecast should lag a month. i.e. I would forecast an estimated ~$200k of work that took place in July for August; forecasting takes place in the last month of July, so I would have a +/-10% accuracy. I will then receive an invoice for $190k in early August and accrue this for August. I will explain the difference (i.e. 2 rain-out days) via my project management channels, and then the $190k accrual will reverse in September with the $190k payment hitting in September (eliminating an accrual-vs-actual variance explanation).
While I'm an engineer, I understand the concept of booking the expense in the period the economic benefit was realized, but 'textbook' accrual examples have been unhelpful for two reasons:
1. They all use simple examples of known material or internal labor costs , not third party T&M for unpredictable maintenance requirements.
2. They all have easy-to-define economic benefits ('we bought a truck we can immediately use' vs 'this scheduled maintenance is completed regardless of if it's really needed')
Option 1: Try my best to estimate month-end costs and then explain the the cost/schedule/performance variance from my forecast in addition to the accrual/actual variance
Option 2: Wait until an invoice is received to accrue.
Background: I am managing spring/summer scheduled maintenance projects and have a maintenance contractor working for 6-7 months continuously. I can roughly project their monthly costs by the day rate of their personnel and equipment, but it is impossible to know the exact charges on the final day of a given month.
Our internal cost analysts / accountants really want me to accrue in the period the work occurred, but they are baffled that my accruals will be significantly different than the invoice (As a hypothetical, I'll do ~$200k of maintenance in a given month, so a rainout day or identification of equipment in bad shape can cause the invoice to be $20-30k different than what I accrue; I won't have the exact amount until early in the next month). I have tried to explain this to no avail.
If accurate cash flow is the driver for this information (not year- or quarter-end reports) I am recommending that my forecast should lag a month. i.e. I would forecast an estimated ~$200k of work that took place in July for August; forecasting takes place in the last month of July, so I would have a +/-10% accuracy. I will then receive an invoice for $190k in early August and accrue this for August. I will explain the difference (i.e. 2 rain-out days) via my project management channels, and then the $190k accrual will reverse in September with the $190k payment hitting in September (eliminating an accrual-vs-actual variance explanation).
While I'm an engineer, I understand the concept of booking the expense in the period the economic benefit was realized, but 'textbook' accrual examples have been unhelpful for two reasons:
1. They all use simple examples of known material or internal labor costs , not third party T&M for unpredictable maintenance requirements.
2. They all have easy-to-define economic benefits ('we bought a truck we can immediately use' vs 'this scheduled maintenance is completed regardless of if it's really needed')