USA Proper Accrual of T&M Construction


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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')
 
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kirby

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The problem is that the internal accountants unrealistically expect perfection from an imperfect world. I suggest you tell them “Hey, why don’t YOU come over and show me how a perfect accrual is done.” If they cower away because they know this is impossible at least they will be off your back. And if they accept, they will soon understand that a perfect accrual is not possible.
 

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