Project accounting: How to weigh project cost-benefits

From planning, scheduling, researching, and reporting, project managers truly are jacks of all trades. Well, here’s another trick to master: project accounting. 

While “accountant” may not be in your official job description, knowing how to budget is an essential part of project planning and resource allocation. Project-based accounting can help you determine the cost-benefits of a project by measuring day-to-day transactions and revenues—because no one wants to be tied to a project that costs more than it’s worth.

What is project accounting?

Project accounting is a way to track the costs of each individual deliverable over the course of a project’s lifecycle. It involves elements of financial and management accounting that allow you, as the project manager, to monitor a project’s financial health and profit margin. 

This type of accounting is valuable because it can help you and your stakeholders calculate project profitability. By tracking a project’s costs and potential revenue sources, you can determine whether the deliverables are worth the outcome ahead of time. You can use these granular details to navigate material, labor, and time challenges.

Project accounting vs. financial accounting

What’s the difference between project accounting and financial accounting? While project-based accounting and standard financial accounting both track business costs and revenue, project accounting focuses on transactions related to a particular project. This method sets itself apart by using different systems, processes, and reporting standards. These include:

• Set start and end dates, meaning your account tracking starts when your project begins.

• Reporting based on deliverables, so you’ll be tracking spending against certain milestones or products you had to buy. 

• Small, specific cost breakdowns by listing costs for every individual task.

• Interchangeable methodology, whether you use cost accounting or accrual accounting, the method won’t affect this process. 

• Shared responsibilities, since project accounting is a blend of project management and accounting, you can split roles between the two or have one or the other handle all responsibilities. 

When to use project accounting

If you want to nail down the details at every level of your project, then project accounting is your go-to method. Through careful monitoring of day-to-day costs, expenses, billing, and revenue, you can use this method to optimize your budget and keep financial goals on track for a specific project. 

You can use project accounting for any project, including: 

• Preparing for a financial audit 

• Taking on new projects outside of your typical scope

• Developing a new product or service

• Implementing business process and technology improvements

• Tracking contract work for unique projects

Consider how you can use project accounting in the construction industry. If you’re simultaneously constructing homes, offices, apartment buildings, and shopping centers, you can’t just report on the costs of those construction projects in one place. To get a clear view of the cost-benefits of each building, you need to track individual project financials and budget.

With project accounting, you can attribute cost and revenue to individual projects, making it easier to see how each is progressing. 

How to use project accounting

Adding project accounting to your workflow can help streamline your project management efforts. Follow the project accounting process flow below to track your budget from start to finish.

The project accounting process flow

With project accounting, you can use financial management techniques to organize, allocate, and maintain individual project budgets. The project accounting process flow breaks down into six main phases:  

Initiation

Before a project begins, complete an initial budget estimation and cost-based analysis. During the initiation phase, you may want to ask yourself

• Is this the right time to take on a new project? Take a good look at your company’s resources, rates, finances, and the progress of current projects. Use this insight to determine if another project is worth the risk.

• What can I pull from similar project budgets to make an estimate? While calculating your budget and cost-based analysis, use information from past projects to help build your estimate. If this proposed project is the first of its kind, you can use top-down estimation to set an overall timeline and budget.

The goal of the initiation phase is to build a case based on relevant financial data and forecasts to advise or dissuade upper management from taking on the new project. You can also provide the client with a rough estimate and timeline for the project. 

Budget

Budgeting indicates how much money is available for a particular purpose. Once initiation is complete, decide the budget you will allocate to each activity group or category for a project. Every deliverable should have an assigned cost. Don’t forget to include indirect costs and non-billable elements associated with cost transactions in your budget, such as overhead costs. 

It’s also important to account for risks when setting your budget. Consider adding a 10 percent cushion against unforeseen costs, like supply price increases. 

By tracking how much money is spent on different levels of a project, you can monitor how efficiently resources and expenditures are being used. This will help ensure the project doesn’t run over budget. 

Administration

During the course of the project, you will also need to process every transaction, track financial commitments and revenue recognition, run billing and invoicing, and generate profitability reports. 

This phase will likely be ongoing through the course of the project. To simplify this process, organize all project financials into a single source of truth—like a work management platform—so you can focus more on strategic objectives. 

Playing a role in the administrative phase of project accounting allows you to easily track planned vs. actual cost, profit, and revenue for a clear picture of a project’s progress. This insight will be beneficial for the next phase. 

Execution

You separated your budget into categories in the budget phase—now it’s time to break the project down even further. When the execution phase begins, each team member will work on project tasks within their assigned category. The budget set for that category should then be allocated toward each task. At this point, you’ll start to see the difference between what you planned to spend and what’s required for your project.

Without careful monitoring, most budgets slip during the execution phase. One of the main reasons for this is scope creep—the addition of deliverables not included in the pre-set project scope. To keep your scope in check, it’s important to accurately track how each team is spending their time and resources. 

Maintenance

Create a process for your project team to continually review, validate, and update the project budget and resources in real-time. This way you can quickly identify inconsistencies and avoid budget overruns.

Anyone who is involved in the project plays a role in maintaining the budget, whether that means accurately logging the hours they spent on a task or documenting which resources were used for what. Your product budget should not be a static sheet for you to refer to every once in a while—it should be updated in real-time, by every team member, for the most accurate and up-to-date information. After every project category is completed, conduct an in-depth budget analysis to address budget overruns and reallocate money if necessary. 

Analytics and reporting

During the last phase of the project accounting cycle, you will need to calculate the total cost, revenue, and profit margin of your project based on your reports. This will help management determine if similar projects will be worth the effort in the future. 

Even if your project went over budget or ended up costing more than it’s worth, there’s a lesson to be learned from these oversights. Once you’ve completed the project, take a look at your reports and make note of the things that went according to plan and the things you failed to take into account. This will help you determine what to improve for the next project, whether that’s streamlining your maintenance process or setting aside a budget contingency reserve.

Project-based accounting best practices

The proper project-based accounting process can give you oversight of every project in your pipeline while helping you break down the smallest aspects of each project to see what costs (and makes) you money. Follow these project accounting principles to keep your project running smoothly.

Use separate accounting systems

Project-based accounting is a lot more detailed than your organization’s typical financial accounting process. It’s good practice to manage these projects in their own separate financial accounts. This will also help you easily organize and access the information needed for individual projects. 

Complete budget estimates before starting a project

Budget forecasting should be a part of any successful project planning process. Complete this step before the project begins so you have a basis for measuring progress, recognizing potential problems, and determining whether the project benefits outweigh your cost.

Focus on resource management

Every project depends heavily on resources, including time, labor, and materials. For project accounting, knowing how to allocate and consume these resources is essential to tracking whether your budget is within your established parameters.

Know your key performance indicators (KPIs)

To ensure the most critical components of your project stay on track, you should be measuring highly relevant key performance indicators. KPIs are quantifiable measures that project managers can use to gauge performance in terms of meeting their project goals. Some examples of KPIs in project management include:

• Schedule performance

• Cost performance

• Resource allocation

• Budget variance

• Customer complaints

• Number of change requests

Keep track of time

Project managers know time is money. Tracking time spent on tasks will help you calculate real time costs and determine if labor hours align with the project forecast. With timesheets or time tracking software, managers can easily report on project finances and see how employees spend their time. 

Run frequent reports

Project accounting is a great way to track progress and day-to-day finances for an individual project. Take advantage of that oversight by running frequent reports to monitor financial health and recognize potential issues before they slow you down. 

Benefits of project-based accounting

With day-to-day detailed financial tracking, project-based accounting offers a plethora of benefits for you and your stakeholders. Not only does financial reporting become easier to manage through separate accounts, but project accounting also helps keep projects within their predetermined scope. 

Key benefits of using project accounting in addition to your organization’s standard accounting method include:

• Improved visibility of daily expenses and revenues

• More accurate accounts for billings, expenses, accruals, etc. 

• The ability to track fiscal differences between two projects

• Real-time updates on a project’s progress and profitability

• Using valuable insights to make future bids on projects

• Accurate data on billing and progress to provide customers 

• Improved resource management

• Calculated actual costs versus estimated costs to help determine scope and pricing for similar projects

• Reduced risk of project failure through improved project management

Project accounting implementation is most common in contract-based businesses, like construction or engineering firms. However, this method can be useful to a variety of organizations. 

Say goodbye to budget overruns

Being a jack of all trades doesn’t make you a fool. If your company could benefit from better costs, expenses, and revenue management, it may be time to give project accounting a try. 

Implementing project accounting into your management process could be the difference between a successful outcome and budget overrun, lack of resources, and costly delays. Keep your finances on track with Asana—manage transactions and time, keep project financials organized, and run financial reports with ease. It can also automate finance workflows and track financial goals.