April 5, 2022
General
Tim Copeland

All About Project-Based Accounting

Project accounting has never been easy on project managers and businesses in general. In this guide, discover the basics and start managing project budgets intelligently.

Understanding project accounting and doing it right is vital for the success of any business, large or small. Without proper financial records you will not be able to accurately track income or expenses on your projects - which could lead some businesses into confusion. This article outlines what exactly project accounting means and dives deeper into the basics and best practices.

financial management of projects

What is project-based accounting?

Each project is unique and carries its own set of challenges, but one thing that remains a constant across them all? Numbers. Lots of them.

Project accounting is how project managers and business decision makers keep track of the numbers such as project costs and financial benefits associated with a single project. In other words, it is the type of accounting that is used to track all financial transactions for a specific project. The main aim of this type of accounting is to provide information that can help in monitoring and controlling the progress and performance of the project.

It's also commonly used to identify projects that will have the biggest impact on an organization, by recognizing those with the biggest potential return on investment. The goal of project-based accounting is to avoid cost and budget overruns and make sure projects are profitable.

Project accounting helps you decide business priorities before starting a new package of work, as well as to report on progress throughout a project and help to keep it on time and on budget.

It can include financial reporting on a range of responsibilities:

The difference between project accounting and financial accounting

The biggest difference between project accounting and standard accounting in its general form is that project based accounting only refers to one specific project. It's the practice of tracking all of the project financials in one dedicated accounting system to enable real time visibility over the costs involved and revenue earned.

project accounting example

There are four main areas where project accounting and financial accounting differ most.

  • Reporting cycles. Financial accounting has regular reporting cycles, most commonly in weeks, months or years.  Project accounting doesn't have the same set cycles, but rather tracks project costs and transactions over from the beginning of a project to the end. It can also track costs throughout stages of a project, but these stages are defined by the progress of the work rather than set time periods. Project accountants may also generate reports in time intervals as they monitor progress closely, for example if they need to update stakeholders on project progress every month.
  • Business factors. Financial accounting involves considering and reporting on every aspect of an organization and its performance. However, project accounting tracks only the financial factors associated with one specific project.
  • Accounting methodology. General financial accounting is guided by either cost accounting or accrual accounting methodologies. In project accounting, either methodology can be used.
  • Cost breakdowns. In general accounting, financial reporting breaks down information into categories such as accounts payable, wages or the overall cost of equipment. However in project accounting, these costs are broken down even further to be attributed to specific projects, and even tasks within projects. For example, this means listing the cost of all individual resources needed to complete one stage of a project.

In practice, these differences affect the ability of decision makers to compare financial reports in project accounting. Individual projects all have their own different circumstances, such as the resources they require or the background business context. Even if two projects appear identical, if they're carried out at different times then costs or other circumstances may be different too.

However, in general financial accounting, comparison is made much easier because of the standardized reporting periods.

This illustrates the benefits of project accounting as it allows for greater insight and decision making. By being able to identify the costs and economic opportunities involved in specific projects, project managers and other stakeholders can build an understanding of how to grow their business.

Accounting information from one project can also be used to estimate the costs and opportunities of future work, even if it is only a guide.

Practical project accounting examples

When should project accounting be used? Generally speaking, whenever a specific project can be identified and have transactions attributed to it, then project accounting principles can apply.

Examples include:

  • Creating a new product or service
  • One-off external projects for a specific client or customer
  • Projects that are outside of an organization's usual scope
  • Analyzing and comparing projects
  • Forecasting, budgeting and prioritizing upcoming projects

An obvious practical example of project accounting is in the construction sector. All of the financial transactions associated to building one house can be clearly identified. A building company may have multiple projects on at one time, and reporting on all of these projects together would reduce their understanding of the costs going into each build.

However, attributing costs and revenue to each individual project allows project managers to easily see how they are progressing.

Key project accounting terms

When you're deciding how to structure the pricing of your project, you have to consider a few things: the length of the project, how much time the project will take, and what services will be needed for completion.

There are three main types of projects that your company can manage: time & material projects, fixed price projects, and non-billable projects.

  1. Time & material projects are ongoing—there's no set end date, and they're meant to be completed over a period of months or years. They're billed by hour, and they require active day-to-day management.
  2. Fixed price projects are just what they sound like: they're billed at a fixed rate, regardless of how many hours the team spends working on the project. These are often short-term, with a specific end date in mind.
  3. Non-billable projects are similar to fixed price projects in terms of their timeline, but their costs aren't passed onto clients. Non-billable projects usually involve internal work such as building out new products or services for your company.

Every project will then have cost, revenue, and profit associated with it.

1. Cost

Project cost represents the total funds needed to deliver a project. In project accounting, cost can be broken down into the different stages, or even individual tasks that go into every project. There can also be indirect costs, such as the price of shipping a piece of equipment.

2. Revenue

Revenue is the price the client pays for the project.

3. Profit

Project profit is the difference between the revenue and the total cost of delivering it. Essentially it's the money an organization makes from each project, when costs are deducted from the revenue.

4. Margin

The margin of a project is the percentage return on investment. For example, if a project costs $500 and it makes an organization $1,000, the profit margin is 100 percent.

Project accountants usually prefer a more granular overview of these - that's why we've decided to include it in our phases reporting. In this project accounting example, a project is split into phases, and each phase has the associated tracking of revenue, cost, and margin.

Why is project accounting important?

The importance of project accounting is in its benefit for understanding the costs and risks of individual projects.

With general financial accounting, an organization's revenues and expenses are reported holistically. They generally aren't attributed to individual pieces of work. This means that the financial impact of individual projects is hard to pinpoint.

Project accounting allows another layer of visibility for project managers and other stakeholders to understand the overall benefit of each project. As well as that, they can track the progress of projects in real time, and make informed decisions based on up to date financial data.

There are a range of other benefits of project accounting:

  • Enabling informed project budgeting
  • Improving resource management capabilities
  • Informing tenders for future project bids
  • Creating visibility and reasonable expectations for project teams
  • Creating transparency for customers and clients
  • Improving overall business financial management

Project accounting dramatically reduces the risk of projects failing to deliver on expectations. It's an active form of project management that allows key decision makers to identify the reasonable benefit of a project and monitor the costs of delivering it in real time.

The role of the project accountant

The job of project accountants is twofold:

  • They report on the viability and forecast benefit of individuals projects
  • They ensure projects are planned and managed through until completion

This includes creating a project budget and timeline, tracking project progress with regular reports and coming up with any problem solving that is required.

A large organization may have a dedicated project accountant, or a small business may make project accounting the responsibility of project managers.

There are a few key challenges that project accountants need to navigate in order to ensure project success:

  • Timely delivery of complete information. Project accountants need accurate visibility over costs and project rollout in order to stay on top of costs and other key performance indicators.
  • Timely reporting. Project data should feed into real-time reporting as much as possible. Tracking projects in a manual spreadsheet means that reports are likely to be dated, which means decisions are based on old information.
  • Understanding actual costs. Having a clear understanding of overall project costs is vital for accurate project accounting. Project accountants also need to be able to break costs down to attribute them to tasks and stages of a project.
  • Gathering data from a range of sources. The larger the project, the more sources of information there are likely to be. Project accountants need to be able to identify all financial transactions, including labor costs and indirect costs, involved in a project.

To understand actual costs on a project, project accountants use variance reporting. Here's a screenshot from a similar report at Runn:

project management dashboard


Revenue recognition

As well as understanding and tracking project costs, a project accountant needs to be able to accurately identify how much money a project will earn the organization. Revenue recognition refers to the time at which that money is made.

There are a range of different revenue recognition methods that can be used.

  • Sales basis. Revenue is recognized at the point of sale.
  • Installments. Payments may be made in installments, which means money comes into the business in consistent time intervals.
  • Percentage of completion. In a long-term project, revenue recognition can occur at pre-arranged stages. For example, there may be a one third deposit, one third payment half way through completion, and payment of the final third once the project is completed.
  • Completed contract. Project accountants recognize revenue and expenses once a project is completed to a satisfactory level and the full costs are known.

There are a range of factors that go into adopting a particular revenue recognition method. The industry of the organization, circumstances of the project and tax implications all influence which method is best suited for a particular project.

In order to enable accurate reporting and comparison, it's crucial that the same revenue recognition method is used consistently across each project, for the whole project duration.

The challenges in project accounting

Project accounting is not free from challenges. The top struggles are mainly based on accurate tracking and reporting financial data all while ensuring there are no cost overruns.

Here’s a lowdown of the main challenges of project accounting.

1. Scope creep

To begin with, scope creep or clients asking for more work than agreed to is among the leading challenges that jeopardizes project accounting. This is often caused by miscommunication about the initial project requirements and goals. When both parties have different ideas about the project at hand, it makes sense that there would be some disagreement down the road.

In fact, 50% of projects experience scope creep, which disturbs budget management. But you can stop it before it starts. Explaining how you charge for work outside the agreed scope is a good start to saving your project accounting from scope creep.

2. Lack of effective project and resource management

Effective, error-free accounting is not possible without having a bird’s-eye view of all the moving pieces of a project. The reason? Until you don’t know what tasks are involved, you can’t track the costs involved correctly.

Similarly, not knowing who is working on the project and what they’re working on can make accounting difficult. At the same time, you need to be aware of any external help that you may have hired for the project to factor in their costs.

The solution here isn’t micromanagement. Instead, accounting for all tasks and resources from the get-go can prevent cost overruns — subsequently improving project accounting.

In turn, all this is possible only when you use a project management software that doubles as a resource management and project accounting software, which incorporates everything project-related in one place (Hint: Runn can do it all for you).

3. Not tracking the numbers in real-time

Unlike traditional accounting that’s planned on a monthly and/or quarterly cadence, project accounting needs to be done in real-time. Doing so helps you stay on track with the planned budget.

The problem? Real-time project accounting using spreadsheets is both time-consuming and prone to errors. It also makes accounting a dry task on your list.

Thankfully, automating your budget and tracking costs live with project accounting software like Runn can help.

For example, using the automated budgeting feature, you can set budget targets for projects and measure your progress against it.

4. Risk of errors can skew your accounting reliability

This is a common challenge with project accounting, setting the need for having at least two people for managing numbers. For instance, one for tracking them and another for double-checking those numbers. 

And it’s not a challenge that you can ignore. The reason? Inaccuracy in inputting and calculating data can have a domino effect. Plus, it can impact the accuracy of your financial reports too. 

Using Runn’s automated budgeting feature can save you from these concerns — you wouldn’t even need to get an extra pair of eyes to double-check numbers:

automated project accounting

5. It’s all very time consuming

And, finally, tracking financial information and generating project financial reports manually using spreadsheets can be very time-consuming.

Not to forget, it comes with a lot of risk of error as we’ve mentioned earlier.

Again, the solution to this is automating accounting so you don’t have to tend to spreadsheets or create financial reports all by yourself. Not to mention, automated project financials can give you budget forecasts that further help with efficient project accounting.

Project accounting best practices

Project accounting is a very important business process. Because it involves tracking and monitoring the financial performance of your projects, many project managers and business executives see it as a necessary evil rather than an opportunity to gain insight into their operations. Often, it’s relegated to the finance department and regarded as simply a way for management to keep tabs on resources.

But project accounting is also a great tool for improving profitability, saving money, and meeting deadlines. You can use it to identify inefficiencies, cut costs, and improve productivity. In this article, I’ll give you some best practices that you can use when implementing project accounting in your organization.

Focus on resource management

It's vital that project accountants have full understanding of all resources that go into their project. Resources such as time, labor and materials form the backbone of overall project costs. Project accountants can maximise resource efficiency with proper planning, and minimize costs with accurate monitoring.

To be successful, you need to know what your people can do and how to allocate them to the right projects. In order to manage resources effectively:

  • Use a tool that enables you to view available resources at a glance.
  • Keep track of skillsets and levels of expertise for every employee (and don't be afraid to ask questions about what they can and cannot do).
  • Make sure you always have a clear understanding of who is working on what.
  • Watch out for over-allocation (it's not good).
resource availability chart

One last thing: Don't forget the importance of soft skills—communication, time management, etc. - in the big picture of resource management.

Track time

In business, time is often the ultimate commodity. But for most people, keeping track of time spent on projects is merely an afterthought. They focus on things they can see—things they can measure in dollars and cents—but not on things that don't have a price tag or aren't as easily quantifiable.

Labor costs are difficult to gauge in real time without automated timesheets. Different staff members have different pay rates, and they may not spend entire days working on a project. Project accountants need to be able to identify the exact cost of labor throughout a project.

Control change

Change management is a major part of project management, and as such it's essential that you fully understand the process. Many people think that it's just about updating a status report and waiting for the change to be implemented. However, this isn't the case at all. Change control is actually something much more detailed.

When project plans change, costs invariably rise. Being able to minimize changes to the overall project roadmap will help to keep costs down. For a project accountant, that means creating a reliable project plan in the first place, being aware of changes as they happen in real time, and making well informed decisions about changes when they do occur.

Manage non-billable work

As the business grows and the firm takes on more clients, it is bound to take on more non-billable work as well. Managing this non-billable work is a critical step in developing a project accounting best practice. Non-billable work includes internal projects, training and vendor management.

While this non-billable work is not reimbursable by clients, it is still important to keep track of time spent on these projects. Non-billable time can be considered a cost center for the business as opposed to a profit center when completing billable client work.

After all, there is a level of administration that is required for any project. Team meetings and internal activities all add to the cost of a project, but they don't necessarily progress work closer to completion.

For project accountants, this means aiming to keep non-billable work to below 10 percent of your own time. This lends itself to using automated processes wherever possible to reduce the time spent collecting and generating data.

Use technology

Using manual spreadsheets to plan projects and monitor progress is problematic. Spreadsheets are error-prone, the data dates quickly, and it's difficult to share insights with all project stakeholders.

However, dedicated project accounting software is engaging and automated, empowering real-time decision making without requiring hours of work.

See how Runn helps with project accounting here.

Project accounting software

Runn project accounting software is one of the best accounting tools for project managers. It incorporates a range of sophisticated, easy to use features to improve the way you manage your business and your projects.

  • Project financials. Get detailed project analytics and automated forecasts for project financials.
  • Visible reporting. Enable business-wide transparency, with users able to view financial information for all projects in one place. Reports can be sorted, filtered and exported easily.
  • Up to date project information. Project accountants can see financial data at any time, with daily financial graphs that generate reports at regular intervals.
  • Staff reports. Understand how well employees are utilized and see how staff members contribute to the financial success of projects, as well as your overall business.
  • Automated budgeting. Set granular budget targets for specific projects, stages, and resources. There's also custom controls to change pricing models or project rates, or incorporate staff leave contingencies.
  • Live tracking. Stay on top of the cost of each project with real-time data. Forecast future projects and budgets to ensure upcoming work utilizes available resources, and pencil in plans to understand their impact before committing.
  • Visibility over KPIs. Project accountants can see the most important key performance indicators in one place.

Using an engaging project accounting software such as Runn brings insights to life, and makes crucial data visible. This data can easily get lost in a spreadsheet, where all information looks the same.

Book a free Runn demo, or try Runn for free today.

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