If you’re looking to maintain more accurate budgets, improve your project planning, and streamline your business operations, you might implement project accounting. Businesses around the world use project accounting to manage the financial transactions on a project-by-project basis. Learning what project accounting is and how to use it can help you make better business decisions.
What is project accounting
Project accounting is the regular tracking of costs and expenses through a project lifecycle. Costs can include labour, materials, utilities, and unexpected expenses such as production errors and unforeseen events. For example, a company launching a new cleaning agent can track the cost of materials, number of labour hours and utilities of the manufacturing plant. Project accounting isn’t limited to the production industry as it can be used in when providing a service as well.
The importance of project accounting
Project accounting can help ensure your yearly budget is accurate throughout the year. By tracking costs by each project, and adjusting your yearly budget after each, your budget will be reflective of your currently financial status as opposed to consolidating expenses at the end of the year. This can help businesses to allocate resources and staffing more accurately and ensure businesses aren’t overspending.
What are the benefits of using project accounting?
There are several benefits you can gain from using project accounting, such as:
Better decision making
Project accounting not only gives accountants and decision-makers an accurate picture of the financial status of a business but gives them information that can help make accurate budgets and forecasts. By tracking each project individually, decision makers can see which projects require what resources and can forecast delays more accurately. This information can help make decisions on which projects a business might undertake and can give them a better understanding of current resources and budget.
More accurate budgeting
Maintaining records as projects go can help your business have an accurate picture of it’s financial budget. By understanding which projects spend more than their budget and which spend less, you can see where your business is situated financially as the year goes on. Project accounting can also help you to identify where you need to allocate more money to on future budgets and where you can save. This can help you to create more accurate forecasts and budgeting on future projects.
Valuable insights
Project accounting gives you valuable insight into your budget and financial planning. Project accounting breaks down projects by cost, giving you insights into where your budget is being allocated, and where you can focus your efforts to reduce costs. You can view which areas are spending more than they are allocated and which areas are underspending. This information can provide valuable information for future business decisions and can affect which types of projects you choose to take on.
Better contract tracking
By monitoring each aspect of a project, you can better track the progress of projects. This can help you ensure documents are accurate, invoices reflect any changes, and that projects are on schedule to be completed. Businesses can use project accounting to see an accurate picture of their projects as a whole and track them from start to finish in an organized way.
Improved customer service
Project accounting can help improve customer service and relationships by giving you an accurate picture of the project as you go. You can update customers of any issues, delays, improvements, or cost differences as the project progresses, which gives customers an accurate picture of the final project before it’s finished. By being transparent with your customers, you may find them more understanding of problems or delays and them wanting to work with you on future projects.
Accurate invoicing
Maintaining records as you go can allow you to update any quotes or invoices you may have given to a customer. If unexpected expenses arise throughout the project, project accounting can allow you to modify invoices before the project is delivered as opposed to at the end of the project. This can help build good relationships with customers and improve business transparency.
The basics of project accounting
Before you implement project accounting in your business, it can help to understand the underlying basic principals that guide it including:
Budget forecasts
Before you begin the project, it's important that you run a budget forecasting process to help you use the project accounting method optimally. This process identifies the estimated costs to complete a project. It indicates if there are any potential issues and monitors progress.
Isolated accounting system
One of the most basic aspects of the project accounting method is the use of a separate accounting system. A separate system can make it easier for you to manage the project's financial elements because it helps to minimize transaction errors. This helps you identify and address any project-related finance concerns quickly.
Concise and current reporting
When creating reports, it's essential that they are clear and relevant to the current project. Ensure that you maintain them regularly, checking to see if they are up to date and then making adjustments as necessary. This makes it easier for everyone to gather the useful and accurate information they need.
Schedule of values
Schedule of values (SOV) is a comprehensive list that defines each work item in the project and assigns it a financial or importance value. It's important that you create this list at the start of the project so you can prioritize each item appropriately. For example, a contractor may have three items on their list, including roofing, restroom accessories and HVAC. Using the SOV, they assign roofing with the highest financial value, HVAC in the middle and restroom accessories the least.
Expense reports
Reviewing your expense reports periodically helps you to better understand what operations and resources are using most of your budget. You can also use these reports to assess where it might be best to allocate your expenses to maximize profits and productivity. Examine the expense report thoroughly to identify unnecessary costs and address them quickly.
Labor hours
Labor hours are the time that a person contributes to the completion of a project. When using project accounting, it's critical that you review and examine the labor hour document for accuracy. It helps you assess if the reported hours align with the labor needs that you forecasted.
Frequent progress reports
Since the project accounting method helps you monitor the status of the project and budget, running periodic progress and financial reports is essential to the assessment process. This helps you gather critical data so you can make more informed business decisions that affect the project. You might also use a request for information (RFI) document to ask for information from suppliers regarding specifications and strategies.
Meeting minutes
It's important that you take meeting minutes after important group discussions so you can have updated information to reference later in the project. Ensure that you accurately report each decision made during the meeting. Doing so helps you track the implementation and results of these decisions to ensure they're effective.
Change order plans
Sometimes critical changes can occur within a project, requiring that you make adjustments to accommodate the new circumstances. You can usually use a change order plan, which is a written agreement about changes to make in a project, like the work duties, deadlines and costs. Use it to identify the specific alterations and determine which ones are most beneficial. Since the changes might cause delays, you can address them quickly with a change order plan.
Key performance indicators
Key performance indicators are necessary when using project accounting because they describe how the project is performing in areas like schedule, quality, cost and productivity. With this information, you can implement a plan or strategy to realign those key performance areas back to the objective. Using these plans effectively helps you to save time, money and resources.
Cost codes
The use of cost codes in project accounting is helpful because they allow you to identify, monitor and assess each project expense. You can make comparisons to determine which ones are most important, but also the most costly. With cost codes, you can accurately manage different transactions at every stage of the project. They also provide you with enough information to craft cost comparison analysis, helping you review the cost of a project compared to the total expense of previous projects.