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PRECURSIVE GUIDE TO PROJECT ACCOUNTING

WHAT IS PROJECT ACCOUNTING?

Project accounting is the mechanism used to track the financial performance of a project. Project accounting will typically focus on key financial elements that make up a project including costs, billing, margin and revenue. Project Managers will typically be given responsibility for ensuring that projects are delivered on time and to a certain budget. The progress of an individual project and then the overall portfolio of projects is usually monitored by the finance and operations teams. Project Accounting is a critical part of a well run professional services organization or delivery team because it will influence the overall financial performance of the business. The best run PMOs are reporting on the financial health of projects in real-time because the forecast of performance as well as the tracking of variance will measure the profitability of the portfolio of work. Accurate information on project accounting will inform investment decisions such as hiring or technology to support project delivery. Project Accounting covers the following items for your projects: 

Budgets
Cost estimates: labor and non-labor costings
Expenses
Bill and Invoicing 
Project Financials, e.g. project margins
Revenue Recognition

WHAT IS THE DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND PROJECT ACCOUNTING? 

Accounting for any software or professional services company is focused on overall operations. Financial accounting will track and recognize costs and expenses by business department or line item. Depending on the type of company, they may well recognize or book both revenues and costs in different ways. A start up may often have a different approach to accounting vs. a mid-market or even public company. 
Project accounting is undertaken on every project and will track the costs, billings and revenues aligned with the deliverables for the project. Companies may choose to report on the progress of a project at a specific point in time whereas standard accounting will issue reports on progress on a monthly, quarterly and annual basis.


Both financial accounting and project accounting will typically utilize generally accepted accounting principles (GAAP). GAAP provides a consistent way to record transactions and other accounting data so that there is a uniform approach across industries and different businesses. A key difference in project accounting is that many companies will ask the project manager to report on the progress made with deliverables such as % completion - there is much less flexibility for choice in financial accounting where there are some fixed principles on cost and revenue recognition as well as billing cycles. In billing, most finance teams want to operate on a 30 day billing cycle with having receivables (payment) cleared after no more than 45 days. In project accounting there are a range of ways that a vendor could bill a customer, let’s have a look at these.


An area of friction for many professional service companies is the difference of opinion in revenue recognition between the PMO and the Finance Teams. Whilst PSA software tools are great for project managers to be able to see project accounting in real-time - they are not a substitute for a finance system which will be the source of truth for the finance team and key to tracking of the company’s financial health

WHAT TYPES OF BILLING EXIST IN PROJECT ACCOUTING?

There are several ways that a company may charge their client for the delivery of a product or service. The 3 most common forms of billing which is the agreed way for a company to issue an invoice for payment to their client is:

Fixed price billing: you agree to deliver a project for a fixed sum with an agreement timeline for invoicing, e.g. we will issue you 1 invoice on this date for this amount.

T&M billing: time and materials billing means that you agree to invoice the customer for the work completed over a specific time period, e.g. we will invoice you at the end of the month for the work completed that month.