The Essentials of Project Accounting

For more than 20 years, I have heard stories on businesses guarding their finances. Most often, the rationale given is that technical staff should only focus on providing their services. To give visibility into the financial side of a project would be both a distraction to staff and open up opportunities for discussions that the firm owners just don’t want to have.

While I can understand the hesitation, I think it’s important you look at the benefits of this transparency.

What is project accounting?

Project accounting helps drive the success of individual projects. In project accounting, we’re looking at the financials of individual projects and not necessarily of the overall firm. Each project functions as its own little business, and, while the firm's financials might be reviewed monthly or quarterly, your projects have very different timeframes.

Benefits

There's really no reason why project accounting can’t be monitored on a daily basis. This allows you to make course corrections immediately if something isn’t working rather than waiting a week when the damage has already been done.

Project accounting allows you to measure in real-time:

• Profits

• Losses

• Utilization

• Margins

• Earned value

This gives you the ability to see issues and make smart decisions to keep individual projects on track.

Project variables can change frequently, so maintaining current financial reports ensures that decisions are based on the most relevant information.

Setting a budget

A high percentage of projects of any type fail because they far exceed their budgets, drag on well beyond their scheduled completion date, or both. Studies show that more than one in three (34%) projects have no baseline. Not having a budget is like driving in a tunnel with the lights off; so once you acknowledge you need a budget, you’re off to a good start.

What’s even more important than the budget is your ability to monitor it and to measure your activity against it in real-time. CORE features a highly flexible work breakdown structure functionality. This lets you and your team seamlessly organize projects by different phases or tasks to efficiently monitor and guide the individual elements of projects. More importantly, it helps you estimate or set budgets for new projects more accurately.

The biggest misconception is that there’s no need to track a project with a fixed fee. Make no mistake! The number one reason fixed fee projects fail is because of the budget overrun. As project accounting is about tracking everything on or against the project, it is easier to track profitability on fixed-fee projects.

Tracking performance

The true value of a project accounting system is that it empowers your project managers. For every $1 billion invested in the United States, $122 Million was wasted due to lacking project performance (PM.org) and 33% of the projects failed because of a lack of involvement from senior management (University of Ottawa).

If you start tracking performance, you can make changes before things get out of hand and you go wildly over budget.

Full transparency

Most managers don’t really have insight into the firm’s full accounting system and that’s okay because they don’t need that level of insight. But when you have admin or accounting staff delivering reports to these managers, you may as well give managers control in the first place so they can get a more granular view of a project.

When your staff manages the day-to-day financials and key performance indicators for their projects, they become responsible for profitability. In essence, each manager or senior associate becomes the CEO of his or her project. There’s actually a formal term for this: Chief Project Officer.

Staff incentives

Most employees are thrilled to have these controls in their hands as they consider it a sign of trust. Moreover, with their performance (and incentives) more closely tied to project profits, you’ll likely see an uptick in both.

Employees need to be empowered with the information that gives them access and control over the profit or loss of each project they work on. Managers should have the ability to see instantly how each of their projects is performing and then make the decisions that will help ensure its profitability.

How to do this in BQE CORE

• You need the ability to assign GL accounts directly to the job – not just the transaction. You can get deeper analytics using classes, too.

• Factor in time and expense tracking as this is what fuels project accounting.

• Allocation is where you assign the team and tell them what to do, when, and for how long.

• Make sure to provide incentives managers. For example, 10% of the profit of the project goes to their bonus. This will make sure all these puzzle pieces are being exploited.

• Make sure everyone is tracking their time properly as this is the cornerstone of project accounting. Even with the right tools, if you still can’t see how much time and expenses have been used on a project, you won’t be able to understand its profitability.

To make this easier, you should encourage your team to use the CORE mobile app. This means they can track their time and expenses on the go, making it easier to remember the details of every meeting and call, as well as any other time they’ve spent doing their jobs.

Project accounting will give you access to information that instantly shows how much you can invoice, write up/down, and tracks the profitability of a project. More importantly, you can compare how the project is performing against the budget.

You need to have a system that enables you to forecast your workload, determine which employees are over- or under-booked, and see who’s available to work on the new project that’s coming the following month. Your system should also forecast the revenue you can expect in future months based on your resource allocation. When properly utilized, you will know exactly who to put on your next important project.

Reporting

The beauty of CORE is it gives you the ability to get real-time information about job costs, then use that information to understand the wider context of the project. How does that cost compare to your budget? How does that cost compare to the contract? And what is your earned value?

This comprehensive report in BQE CORE is called “Project Profitability”. With project accounting, you can run a profit and loss report at the project level.

The Work in Hand information reminds principals, owners and project managers of the efforts needed to complete current jobs. In addition, it reminds them to not shortchange their business development time budget. They need to keep the pipeline full and close new contracts on a regular basis.

Finally, remember, the only thing more important than the budget is your ability to monitor that budget at the project level.