What is Project Accounting?
Project Accounting is a specialized field that links Financial Management with the management of work and people.
In short, it is a system used to track, budget, & report on the financial progress of projects.
Project Accounting involves keeping track of the financial aspects of a specific project. Organizations can determine if the costs involved in a project, such as time, materials, equipment, and other expenses, are worth the financial outcome generated upon project completion. Project accounting can help plan your future projects to meet certain financial standards.
Project Accounting provides assurance that all costs are within control during the project lifecycle. It also helps ensure sustainable utilization of resources and greater awareness during project decisions for service or project-based organizations. This ultimately leads to greater chances of project success.
There is a difference between Project Accounting & Financial Accounting
The scope of Project Accounting and Financial Accounting differ, but both revolve around finances. Project Accounting is focused on the finances 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’s start and end dates are definite and defined by the project lifecycle. Project Accounting requirements close once the project is completed.
- 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 Accounting budgets and spending are tracked against the predetermined milestones of the project. 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 to support large-scale projects, such as engineering, construction, or government initiatives. However, once organizations realized that every project is a unique entity, requiring a different approach in terms of finances, it quickly developed into a core process under Project Management in other industries. Project financials cannot be accurately analyzed using general Financial Accounting methods.
Data-driven Decisions that are Proactive
Project Accounting also enables data-driven decision-making by offering another form of transparency. It becomes easier to make budget corrections as the project progresses when all financial metrics are monitored, as the data will tell you exactly when you need to make those changes. For example, understanding the cost variance and the schedule variance together will give you a good indication of project health while the initiative is active. Project Accounting can also ensure future success by providing valuable insights from post-mortem examinations.
Greater Customer Satisfaction
Project managers and their clients can avoid surprises down the line by increasing transparency around financial metrics and improving revenue forecast accuracy. Not only are potential issues identified well in advance, but costs are managed too. This allows for better understanding between customers and the organization by informing clients beforehand.
Resource Management and Project Accounting Work Together
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. It is easier to stick to estimated budgets when a proactive, future-ready resource plan that accounts for costs as well as time is developed.
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.
Bring a Time Tracking System into the Mix
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 labor actuals to the forecast lets the management team understand if project leaders are requesting too many or too few resources. 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
One of the reasons companies pay close attention to the deployment of human resources is that work on certain projects counts as capital on the balance sheet rather than an expense. This type of accounting treatment is only available when an employee contributes to a project that builds, maintains assembles, or enhances a product or company asset. All other work is generally expensed. By shifting dollars from expense to capital, a company can show greater profitability in a particular operating unit and in some cases receive tax credits. Of course, these results are highly attractive to managers and worth the effort of monitoring how labor dollars are spent and who is paying for them.
Resource Capacity Planning and Long-Range Financial Planning
Using long-term forecasting to gain visibility into future headcount and skill requirements is a critical part of Resource Management. The execution of such a staffing plan requires a joint effort between the Functional Management of an organization and its Financial Leadership. The connection is logical; without the budget and funding commitment for hiring, the staffing plan cannot be successful. For that reason, the planning of resource headcount and the annual budgeting process needs to be in lockstep. The way capacity is measured, the way resources are forecasted and costed, and the way they are charged to cost centers must be acceptable to managers of both the Resource Management processes and the Project Accounting processes. When that does happen, operations become much more predictable, problems are identified early on, and there are very few staffing or funding surprises.
The right tools can assist in the integration of Resource Management & Project Accounting.
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 when the resource management system can integrate with the company’s financial system, thereby eliminating duplicate data entry and improving data credibility. Is this difficult? If the resource management system, like PDWare® ResourceFirst™, has a secure API, data encryption and aligns with a company’s authentication technology, the process is fairly straightforward.