Every month end, finance asks the commercial team one question. What have we actually spent or earned on a project?
Not what’s been invoiced. Not what’s been paid. The true value of the work done.
Get that wrong and the business makes decisions on bad numbers. In this article we’ll cover accruals, value of work done, and how to pull them into a month end report you can stand behind.
Metroun LearningShort courses with structured CPD, 20 minutes eachStart ›What is an accrual?
An accrual is a cost you’ve incurred, or revenue you’ve earned, that isn’t yet posted in the accounts.
Accounts run on the accruals principle, sometimes called matching. Costs and revenue belong in the month the work happens, not the month the money is deposited or withdrawn from the account.
Say a contractor resurfaces a car park in March but doesn’t invoice until May. The expenses and revenues related to that work still belong in March. Without an accrual, March looks cheap, May looks expensive, and neither month tells the truth.
What is VOWD?
VOWD stands for value of work done. It’s the commercial team’s best assessment of the work completed to date, valued under the contract, whether or not it’s been certified, invoiced or paid.
VOWD is cumulative. It’s built from measured progress on site, contract rates, agreed variations and any other entitlement the contract gives the supplier.
The key word is assessment. VOWD is your view of the value, not a copy of the supplier’s application.
How they fit together
Here’s the simple version. Your accrual equals cumulative VOWD minus cumulative amount invoiced.
Say VOWD to the end of the month is £500,000 and the contractor has invoiced £420,000. You accrue £80,000.
Next month, the invoice for that £80,000 lands. If the accrual isn’t reversed, you’ve counted the same cost twice. That’s why many finance systems post accruals as auto reversing. In this month, out next month.
The month end process
Here’s a process that works on any project.
- Fix the cut off date. Usually the last day of the month. It makes valuations clean and often makes it easier to tie amounts in with financial year ends.
- Gather the evidence. Site progress, measures, timesheets, dayworks, delivery notes and the supplier’s application.
- Assess. Value the work at contract rates, not at the figure applied for.
- Deal with change properly. Agreed variations go in at the agreed value. Unagreed change goes in at your realistic assessment.
- Compare VOWD with invoiced to date and post the accrual.
- Write commentary. Explain movements against last month’s submission and the forecast.
Common mistakes
These are the ones we see most often.
- Accruing the application value or invoiced value instead of your own assessment.
- Assuming the application or invoice reflects all work carried out.
- Forgetting to reverse the accrual, so costs get counted twice.
- Stale accruals. Items sat there for months that nobody has challenged.
- Treating retention wrongly. Retention held is still work done and still a cost.
- Confusing commitment with cost. A purchase order is money committed, not work done.
If you work contractor side, the mirror image of this is the cost value reconciliation, where you compare cost against value to find your true margin.
What a good report looks like
A good month end report fits on one page. It shows VOWD, invoiced to date, the accrual, the movement from last month, and the forecast final cost, with the key risks underneath.
The test is simple. Could someone in finance read it and understand your position without picking up the phone? If yes, you’ve done your job.
So, to recap. Accruals put costs in the right month. VOWD is your honest assessment of work done to date. Your accrual is VOWD minus invoiced. Reverse it, refresh it and explain it every month.
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