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:
Cost estimates: labor and non-labor costings
Bill and Invoicing
Project Financials, e.g. project margins
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.
Milestone based billing: you agree to issue an invoice to the customer when you reach certain milestones, e.g. we will issue an invoice for X amount when we reach the go-live of this system.
WHAT ARE THE BENEFITS OF PROJECT ACCOUNTING?
The impact of good project accounting is a key component for any delivery teams growth. As project teams professionalize and adopt best practice project management principles e.g. PMi or Prince2 - being able to assess the performance of a project as it happens will help you manage work better internally and with your customer. Project managers are the steward of your customer’s budget and being able to track the budgets and revenues across every stage of a project allows them to better manage customer expectations. If you are ahead of your original plan or perhaps things are not going as they should, having this project accounting data will allow the project manager to proactively communicate progress to the customer.
Having access to project accounting software will ensure that your team stays a step ahead of any budget issues and avoids a situation where you have to go to the customer and explain that you have burned through the budget too quickly. The customer will expect you to communicate progress in an accurate and timely way. Too often companies struggle with manual tools or spreadsheets to generate project accounting information.
Key benefits from project accounting include:
Better decision making: because you can see what is happening in real-time and adjust accordingly.
More time back: given the low admin burden on you and your team to generate data.
Improved relationships with customers: because you have a reputation for quality of delivery and billing accuracy.
Organizational capability: with seamless transitions between sales, services and project delivery teams who are aligned on budgets and all key KPIs.
Predictive Growth: can be achieved because you are improving the performance of delivery over time leading to improved margins and profits that can be reinvested into your business.
THE ANATOMY OF GOOD PROJECT ACCOUNTING
“I’d like you to run over budget and not tell me and then not deliver what I asked for”...said no-one ever.
Let’s unpack what good project accounting is and how it links to project and resource management. Here are the key steps to focus on in project accounting.
The PMO or project manager should collaborate with the sales team to understand what has been sold if they were not involved in the pre-sales phase. The PM or resource manager should mobilize the right team with the right skills to deliver the work. Decisions on staffing should take into account the costs of resources vs. the budget. The project management software should allow the PM to assign people to roles and include a rate card if appropriate. The best companies are able to communicate internally and with their customers when they can take on more work and start dates based on the capacity of their team. The ability to mobilize effectively in initiation will influence the long term profitability of a delivery team because delays mean people are sat on the bench waiting to start.
Planning and Budgeting
Project planning should produce a detailed project plan including tasks and dependencies, a resource plan alongside the project’s budget and billing milestones. This project plan will include:
Statement of Work
Task List and Dependencies
Start date, end date
Key project milestone date
Summary of project deliverables
Expected delivery dates or go-live dates
Original budget for time and money
Process agreed with the customer for change requests
How value is defined by the customer
The best companies use project templates to reduce the admin burden during planning and budgeting. They have used analytics to understand the performance of previous projects to inform the way future work should be planned and budgeted to maximize margins.
Finance teams want their project managers to display fiscal discipline to ensure that projects are managed to budgets but not at the expense of delivering value to the customer. Best-in-class project execution will feature accurate project accounting and a proactive management of any issues or delays that would lead to rising costs and declining margins. There are several factors that influence the execution phase:
The skills and capability of the project manager in managing the project and the customer effectively.
Agile resource management to ensure that you are able to get the right people to work on tasks in a timely manner.
Capacity planning to ensure that you avoid bottlenecks in project execution where multiple pieces of work are looking for the same resources at the same time.
Customer communications needs to be clear and concise to make sure the customers know what they need to do and when as well as understanding the performance against budget.
Managing scope creep to ensure that both parties are aligned on what to do should additional requirements be surfaced during an implementation. The PMi Institute research shows that more than 50% of projects experience scope creep.
Good project accounting software will also include the functionality to help you manage all these issues as well as tracking progress with regards to costs, milestones and project profitability.
The importance of real-time data on project performance is critical to maintain the overall success and health of a project portfolio. Complex project work requires your organization to track timesheets and expenses for your team as well as potentially non-labour items that are relevant to delivery. Precursive’s customers need to monitor a range KPIs during a project including earned value calculations. Project accounting requires a clear process for monitoring transactions by recording and processing cost and revenues. Finance teams will need to track the progress of financial commitments and be able to run billing and invoicing reports alongside revenue recognition.
The best teams always plan for the unexpected and know that despite the best plans, there may be a need to request more time or budget at a specific stage of a project. Project accounting software shows you where projects are slipping and can help you predict where you may need to make a change request. This will help you better manage the communications of these requests with clients as well as figuring out what factors are causing things to over-run. A project manager should be able to quickly communicate the need for a change request internally with their own stakeholders and then take that request to the customer. There should be a pre-agreed approach for making change requests and the supporting data that will be needed for their approval. Ideally you will have a project contingency baked into your project plan and agreed with the customer which will allow your client to potentially budget for that overrun.
Customers are increasingly likely to expect a status report as your project progresses. For some companies this will mean you will have to share:
Overall health of project, e.g. red, amber, green
Progress to the baseline - are we on track
Any delays and the reasons for delay
Budget progress, e.g. how much budget has been spent
Planned hours vs. actual hours
Key milestones achieved
What are the blockers and where can the customer help to resolve this
Project accounting software will have the ability to generate reports that can be shared with the customer either via a community or exported and shared with a CSV file depending on some security policies that dictate customer behavior.
Project closure will be directly linked to whether value has been delivered to the customer. With advanced project accounting capabilities, the best companies can reduce time-to-value because they have a much better handle on budgets and timelines across their entire portfolio of work. During project closure both the PMO and finance team will be looking at the performance of the project and what learnings there are that could be incorporated into future delivery. The best companies are not just thinking about how to manage project risks and issues but rather understanding project insights and learnings that can help them create more repeatable playbooks for delivery.
PROJECT ACCOUNTING IN PRECURSIVE