In the intricate world of business management, mastering project accounting is essential for steering projects towards financial success. This discipline, distinct from general financial accounting, focuses on the specific financials of projects, including detailed cost control and resource management. Resource management and project accounting are closely linked because employees and consultants generally dominate total project cost.
What Is Project Accounting?
Project accounting is a system used to track, budget, & report on the financial progress of projects.
Depending on the financial goals of an organization, there are various approaches to costing a project. Early in the project life cycle, project based organizations try to estimate the const impact of a new initiative on the overall portfolio spend or budget. This allows these organizations to assess whether the financial investment in a project—including labor, materials, equipment, and other costs—yields a worthwhile financial return upon its completion.
Traditional project accounting practices also ensure that costs are managed and controlled throughout the project’s lifecycle. Since labor cost can be a large component of the overall spend, the credible management of resource allocations and overall utilization, is important to both project management and cost control. When resources are poorly planned, milestones are missed, the project is delayed and costs tend to increase.
For many project teams, understanding the relationship of cost variances to schedule variances is important to maintaining project control. Having this information available for decision-making, ultimately leads to a greater chance of overall project success.
Project Accounting vs. Financial Accounting
The scope of project accounting and financial accounting differ, but both revolve around finances. Project based accounting is focused on the financial performance of specific projects or initiatives, while financial accounting deals with the overall organization. Of course, there is some overlap, but there are also additional differences to be noted as well:
- Project accounting operates within the defined start and end dates of the project lifecycle, with requirements concluding upon project completion.
- Project accounting metrics tend to be based on the deliverables or stage gates of the projects, whereby, Financial Accounting is tied to the fiscal calendar.
- Project expenditures are aligned with predefined project milestones to track budget progress. Given that Financial Accounting deals with an organization’s profits and losses, it focuses on business and operating units at a higher level.
Project accounting was traditionally used for large-scale projects, but as organizations recognized each project’s unique financial needs, it has become a core process within project management across sectors. With strong resource management and reporting tools, like PDWareⓇ ResourceFirst™ , it is now much easier to forecast and track costs and resources across all projects, both individually and for the entire project portfolio.
Benefits of Project Accounting
Data Driven Decision Making
Project accounting equips organizations with crucial financial insights, enabling strategic decisions that improve project outcomes. Project managers utilize this precise, real-time data to refine resource distribution, pinpoint potential cost reductions, and confirm the project’s financial health. This proactive approach not only boosts project efficiency but also aligns with broader organizational goals, ensuring a more effective management and execution of projects.
Improved Profitability Comparison
Project accounting boosts profitability by allowing organizations to compare the benefits and costs across projects, allowing for better funding decisions and risk management. Tracking each project’s expenses and revenues, and pinpointing the most lucrative ones, even a small organization can improve delivery results.
High-performing projects can also become models for future efforts, by establishing financial benchmarks and improving estimating practices. This approach not only maximizes profits in the short term but also drives longer term sustainable growth.
Enhanced Customer Satisfaction
Project managers and their clients can avoid trouble spots down the line by increasing transparency around financial metrics and improving revenue forecast accuracy. By identifying problems early and adjusting cost forecasts, the organization not only avoids unexpected issues but also builds a stronger bond with clients.
How Project Accounting Works With Resource Management
As resources comprise a considerable portion of project costs, project accounting can help improve overall resource management processes. Project accounting can provide better visibility around resource costs and time, supporting capacity planning and resource allocation. Developing a proactive, future-ready resource plan that accounts for both costs and time makes it easier to adhere to estimated budgets.
For many project-based organizations, the #1 internal cost is labor. Most managers would like to know what each initiative is costing, which cost centers are being charged, and if costs are in line with the original budget. The combination of resource management and financial accounting provides this visibility. When resource forecasting is linked with project accounting, labor costs can be calculated in real time. This is one of the reasons accurate forecasting and periodic updates are so important. Add in non-labor project resources to the forecasting process, and you have visibility into total project cost.
Best Practices of Project Accounting & Resource Management
Using Time Tracking to Audit the Project Accounting Process
Tracking actual work hours via time sheets complements both resource management and project accounting. Using a record of what actually happened, as compared to what was originally budgeted and later forecasted, helps a management team understand how well they are planning.
Comparing actual labor cost to the original budget lets us know if we overestimated or underestimated the quantity and type of people we would need to complete the initiative successfully. The process of tracking time on a weekly or monthly basis also helps employees and their management better understand how they are dividing their weeks, and whether or not they are aligning their effort with strategic priorities.
Capitalizing R & D Costs
Companies pay close attention to the deployment of human resources because work on certain projects can be recorded as capital on the balance sheet rather than as an expense. This accounting treatment is available when employees contribute to projects that build, maintain, assemble, or enhance a product or company asset. All other work is typically expensed.
By shifting costs from expenses to capital, a company can show greater project profitability in specific operating units and potentially receive tax credits. These benefits are highly attractive to managers and justify the effort of monitoring labor expenditures and funding sources.
Resource Capacity Planning & Long-Range Financial Planning
Long-term forecasting to predict future staffing and skill needs is essential for effective resource management. To successfully implement a staffing plan, both the functional management and financial leadership of an organization must work together. This collaboration is necessary because a staffing plan won’t work without a budget and funding. Therefore, planning for staffing and budgeting must be done together.
The methods for measuring capacity, forecasting and costing resources, and charging them to cost centers must be acceptable to both resource management and project accounting managers. When these elements align, operations become more predictable, problems are identified early, and staffing or funding surprises are minimized.
Streamline Project Accounting & Financials with ResourceFirst™ Software
As discussed, there are several important touch points between resource management and project accounting, including budgets, forecasts, actuals, labor rates, non-labor project costs and cost centers. Moreover, the information flow can be bi-directional. If organizational processes are not well thought out, both the Program Management Office (PMO) and the financial leadership can be inundated with spreadsheets, duplicate data entry, and redundant processes. All of this leads to poor quality and a lack of credibility with the people who need to support and contribute to the process.
This can all be avoided with PDWareⓇ ResourceFirst™ software which integrates with an organization’s general ledger system. The platform’s powerful data integration engine connects financial data, resource information, and project details into a centralized, real-time system. This unified view empowers project managers to make informed decisions based on accurate, up-to-date financial data.
ResourceFirst™ features include:
- Cost/rate matrix
- Resource forecasts
- Resource utilization
- Financial reporting rollups
- Accurate single POVs
By seamlessly integrating project accounting and resource management, ResourceFirst™ helps organizations streamline financial processes, enhance collaboration, and drive sustainable project success. Through its data integration and analytical tools, ResourceFirst™ navigates the challenges of project accounting and unlocks the full potential of project investments.
Experience the power of ResourceFirst™. Contact us to learn how resource management software can transform your project accounting approach.
