What is Project Accounting?
Project accounting is exactly what its name implies: accounting for a particular project. Project accounting is a type of accounting practice that tracks the costs and the financial benefits of a particular project. With it, organizations can determine if the costs involved in a project, such as time, materials, equipment, and other expenses, are worth the financial outcome it will generate on completion. Project accounting also helps in planning projects to meet specified financial parameters.
A subset of financial accounting and project management, project accounting is a comparatively new field. Nonetheless, its value is demonstrable in the way it supports effective project management practices by delivering a comprehensive view around project financials. Project accounting also provides assurance that all costs are within control during the project lifecycle. For services or project-based organizations, it also helps in ensuring a sustainable utilization of resources and reduce project failures as a result.
Project Accounting vs. Financial Accounting
Both project accounting and financial accounting revolve around finances but they differ in scope. More specifically, project accounting is solely focused on the finances of a particular project while financial accounting is broader as it deals with the overall financial aspects of the organization. There are other differences to note as well.
Project accounting has definite start and end dates as defined by the project lifecycle. Once the project closes, so does its project accounting requirements. Financial accounting, on the other hand, governs the finances of the entire organization throughout the financial year. Additionally, project accounting reports are based on the deliverables of the projects. Spending and budgets are tracked against the predetermined milestones of the project. Financial accounting is high-level in its approach, given how it deals with the bottom line of the organization and its profits and losses.
Why Do You Need Project Accounting?
Traditionally, project accounting was leveraged to support large-scale projects such as in engineering, construction or government initiatives. It has, however, quickly developed into a core process under project management in other industries once organizations realized that every project is a unique entity, requiring a different approach in terms of finances. General financial accounting is unsuitable for analysing project financials. This led to the development of project accounting, a unique accounting domain exclusively for projects.
For organizations, adding another process to the existing project management workflow can be a concern. Despite this, the implementation of project accounting can support and streamline project management. Here are some of the benefits you can gain from project accounting.
Better Visibility Around Profitability
With project accounting, you gain visibility into the financials of any project at a granular level. By tracking the resources and costs involved in the project and the resulting revenue generated, it becomes easier to understand the exact areas of success and failure. You can learn what is occurring at every step of the project’s life such as which tasks had the greatest impact on profitability or whether you estimated expenses properly. By learning the answers to similar questions, you gain a better insight into the ways you can improve the financial performance of projects. Overall, project accounting allows for a better understanding of project profitability.
Proactive Data-driven Decisions
The visibility offered by project accounting also enables the ability to make informed data-driven decisions. As all financial metrics are monitored, it becomes easier to make course corrections as the project progresses and the data will tell you exactly where you have to make those changes. There is no need to wait for project completion and then figure out what went wrong. While post-mortem examinations can offer valuable insight for the future, project accounting ensures that you can bring your ongoing projects back on track towards success.
Increased Customer Satisfaction
Project managers do not like budget overruns but they like it even less to inform clients of the same. However, project accounting can help organizations get in front of those issues and can prevent risks from snowballing. Project accounting increases transparency around financial metrics and improves revenue forecast accuracy, helping clients and project managers avoid surprises down the line. Not only are costs managed but also potential issues are identified well in advance. This allows clients to be informed beforehand, ensuring a better understanding between customers and the organization.
Improved Resource Management
As resources make up a considerable part of the costs of any project, project accounting can also help in improving the overall resource management processes. Project accounting can support capacity planning and resource allocation by providing better visibility around resource costs and time. It promotes the development of a proactive, future-ready resource plan that accounts for costs as well as time, making it easier to stick to estimated budgets.
Who Needs Project Accounting?
Project accounting grew out of a need to manage large capital projects such as those taken on by government agencies, engineering firms and construction companies. These projects have large upfront costs but the benefits are only realized in the long term, making it crucial to track and manage the investments as the project progresses. However, many organisations have discovered that project accounting can also benefit several other businesses as follows:
- Enterprises that are planning a new product or service
- IT firms with large scale projects
- Architecture firms
- Financial services organisations
- Management consulting firms
- Firms specializing in systems and technology implementation or integration
While project accounting is a necessity for organisations mentioned above, the fact remains that it can bring major benefits to any firm looking to rein in the costs and improve profitability around their projects.
Project Accounting Best Practices
Every organisation approaches projects differently and every project will have its own set of deliverables and requirements. Therefore, each organisation will also be approaching project accounting in different ways as their business demands. Be that as it may, there are some best practices around project accounting to be aware of.
Work on Managing Costs
To succeed with project accounting, there should be a renewed focus on cost management. All projects are dependent on time, material and labor, all of which add to the costs of the project. As a result, it is vital for project managers to understand how each of these resources have been allocated as well as their consumption levels. Monitoring these costs helps in ensuring that the numbers are within the expected budget parameters. To prevent cost overruns, it is vital that all costs around time, materials and labor are accounted for even before the project starts. It is also crucial to take into account additional costs that are not immediately recognizable. This includes ancillary costs such as material deliveries and installation.
Bring in Time Tracking
Time tracking provides more than one benefit to project accounting. Tracking time allows you to accurately calculate the time cost part of the project. Additionally, it helps in providing more clarity around the progress of the project, as the time spent by each employee on each task is monitored. This, of course, will also help project managers improve resource allocation to ensure that each task is completed by the most suitable employee in the least amount of time, resulting in lower costs. With time tracking, it is essential to have real-time data from timesheets. Therefore, investing in a proper time tracking system can be enormously beneficial in the long run.
Control Administrative Work
Administrative work is typically non-billable. As a result, the time and labor invested in it will add to the costs of the projects but will generate any direct revenue from the client. Administrative activities such as meetings, research, and project planning are all critical to project success but they will consume the allocated budget, making it essential that they are controlled. Typically, organizations should strive to keep non-billable work under 10% of the total time spent on projects to ensure that allocated costs are controlled. The use of automated tools to do the heavy lifting such as time tracking can help in reining down the costs by reducing the time spent on those activities. Even an automated project accounting system can help here.
Implement Change Management
Changes can happen anytime during the project execution for a variety of reasons. However, it is often difficult for project managers to proactively account for those changes, which can lead to issues such as scope creep. By the time the change is noticed, it will already have affected the finances of the project. Implementing a proper change control mechanism will help in fixing that while helping to keep the numbers steady. With project accounting, it becomes easier to compare numbers around changes and make the right decisions to stay within budget.
Leverage Project Accounting Software
To streamline project accounting in your organization, the right project accounting software is a must. These tools can help track all details of the project including estimates, bids, purchase orders, billing, change orders, resource costs, time costs and more. As a result, project accountants will not have to hunt around to get the data they need. Project accounting software can make it easier to generate the insights necessary to ensure profitability and prevent overruns.
Choose Replicon for Project Accounting
The right tool can help organizations enhance their project accounting efficiency significantly by pulling together not only financial data but also non-financial details and present those details in one unified view. Replicon’s award winning Time platform does that and more.
Replicon’s cloud-based and mobile-ready platform provides a single source of truth on time, costs, and pay, making it easier to monitor all project accounting metrics. With Replicon, you can keep track of all project costs, identify potential risks and improve overall project performance and profitability. Here are some of the ways why Replicon can be the ideal solution for your organization.
Advanced Configurable Time Tracking
Replicon gives you the ability to configure and customize timesheets to capture the exact details that you need for your project accounting requirements. All details are tracked in real-time, ensuring that you always have the latest information to base your decisions on. With Replicon, you can track both billable and non-billable hours by project and tasks and assign it to multiple or single clients for increased accuracy while billing.
Accuracy is of the utmost importance when calculating project finances and Replicon makes it easy to ensure the precision of the data captured. Advanced validation rules can be configured as needed by your business policies to eliminate billing errors. Real-time notifications ensure that all users submit timesheets on time for processing accuracy. Moreover, multi-level approval workflows can be defined to ensure all supervisors sign off on the submitted timesheets before the data is used for accounting purposes. Real-time intelligent approval workflows ensure that the timesheets are dynamically routed to prevent bottlenecks and delays.
Easily Track Budgets vs Actuals
Replicon allows you to set the budgets around time and costs at the project and even the task level for increased visibility. It is even possible to roll up this data to generate estimates in the timesheets for easy visibility on the progress made. All resource costs can be tracked and compared with budgets for proactive decisions on financials. Historical information is also available at your fingertips which enables you to make better estimates on upcoming projects. With real-time tracking of budgets vs actuals, optimizing costs becomes easier as well.
Robust Analytics and Reporting
Leverage out-of-the-box reporting capabilities of Replicon to gain real-time visibility into projects, resources, time and costs whenever you want. The flexibility of the reporting capabilities ensure that you can create customized reports to meet the unique needs of your organization and stakeholders. Replicon also provides dynamic dashboards that provide comprehensive visibility across the project in one single location, making it easier to stay on top of metrics such as margins, utilization, and costing. Making proactive decisions has never been easier.
Seamless Cloud-based Integrations
Replicon’s platform is designed to ensure easy integration with the existing ecosystem in any organization. Easily share project financial information with the relevant solutions such as payroll and billing in a few clicks, reducing administrative overheads and streamlining downstream processes. Replicon offers turnkey cloud-based integrations to enable faster deployment, integration and upgrade. You also have access to pre-built integrations with all the major solution providers. For those with legacy systems, Replicon can create custom integrations to solve data sharing challenges across the organization’s ecosystem.
One Solution for All Project
You can support your project management processes by controlling project costs and avoiding issues with project accounting. However, the right project accounting tool can do more by empowering your organization to increase control over projects and their profitability. With an advanced cloud-based, mobile-ready solution like Replicon, project accountants can rest easy by letting the tool do the heavy lifting for them.
Learn more about how Replicon can help with project accounting by talking to our experts now!