13 May 2011

Considering Project Accounting for Increased Profit

Many folks confuse the terms “project management” with “project accounting.” These terms are not synonymous. As might be inferred from their distinctions, project accounting is all about tracking the monies associated with projects. Project management is related to managing project tasks, time and resources.

While there are some software applications that handle both the project accounting (PA) and the project management (PM) aspects, most common applications handle only one side or the other. For example, Microsoft® Project™ is a very commonly used application for project management. It is worthless, however, for anything related to project accounting.

Why aren’t project management and project accounting found in the same application?

In most organizations, the fact that project management recording and project accounting transactions do not occur in the same application typically poses few hurdles to operational effectiveness. The reason for this is simple: typically the personnel intimately involved in managing tasks, time and resources (i.e., the project managers) are not the same folks who are intimately involved with handling the accounting aspects of the project (e.g., calculating, printing and sending the project invoices, making payments to project vendors, or assuring that expense or payroll transactions are processed on time). Therefore, the ability to share data via simple integrations or even via ad hoc queries or reports is quite frequently sufficient.

In fact, not infrequently, organizations actually prefer to have project managers and their activities kept separate from project accounting and its related activities. Doing so functions as a double-check and adds control in itself.

“We don’t do projects?” we hear you saying

You don’t think you’re in a “project”-type industry? Well, maybe you’re right. But consider these possibilities:

  • Internal projects – Does your organization do internal projects for which you’d like to track costs accurately, even if you never bill anyone for the services? Do you do advertising campaigns? IT projects? Opening new locations? If so, then it is possible that your business could benefit from the additional controls provided by a project accounting solution.
  • Engineer-to-Order – If you are a manufacturer in an engineer-to-order (ETO) industry, then project accounting might be applied to track your costs leading up to the manufacturing. Professional services and related costs and expenses can be tracked and managed using project accounting’s capabilities.
  • Installation or After-Market Service – If your manufacturing or distribution operations extend themselves into the fields of installation, configuration or after-market service, then chances are project accounting is not the right solution for you. In such cases, you should read the section on Service Management.

What can Project Accounting do for you?

There many time-saving functions brought to you through the project accounting capabilities that dramatically reduce the time, energy and effort that would otherwise be required. Here is a sampling:

Profit Recognition

Projects may recognize profit/(loss) in several different ways. Most PA solutions allow users to assign the profit recognition method by project. The typical profit recognition methods include:

  1. Manual
  2. Cost-to-cost percent
  3. Percent of revenues
  4. Non-WIP
  5. Project completion
  6. Percent of elapsed time

“Percent of elapsed time” is a profit-recognition method commonly used with prepaid date-limited service contracts. If this is a common method in your firm, be sure to investigate Service Management solutions as well. In some circumstances, service management may be the more appropriate solution to apply.

Project Billing Methods

Project accounting software typically offers several options for billing and projects may be of different billing types:

  1. Time and materials
  2. Fixed price
  3. Fixed price plus

When a project is designated a “time and materials” billing type, most project accounting systems allow the materials items to be passed through at cost to the customer, or billed with a mark-up add to designated materials and other non-labor charges.

Billing for Employee Time

Businesses that bill their clients for employee time spent on various projects often face the daunting task of keeping the billing correct based on agreements with their various clients. Not infrequently such agreements may involve complexities that would require considerable time and care if attempted without the support of a project accounting system.

For example, clients may negotiate different rates for different specific employees when working their projects. Indeed, they may end up negotiating different rates for the same specific employee on different projects—several of which projects may be underway at any one time with the same client. As you can imagine, assuring that project billings are assigned the right rate for the right resource on a project by project basis could become a difficult task. Project accounting systems handle such billings effectively and simply with little effort.

Add to the potential complexity described above the ability to also bill different rates to different projects or different customers based on the employees’ titles in their assignments to different projects and you can readily see that manually tracking all of the potential combinations could become a nearly impossible task. Here, for example, employee Jim Smith might bear the title “Project Manager” on one project for one client and, as the Project Manager be billed at $225 per hour. However, due to Jim’s lack of experience in another type of project, he may bear the title “Developer” on that project and be billed to the same client (or a different client) at a rate of only $150 per hour.

Increasing throughput and profits

Now, you might say, “I don’t need all that complexity in my projects. We’re content with billing just one rate per project, one rate per client, or one rate per employee across all projects and clients.

Our question in response is this: “Why wouldn’t you want to make more money tomorrow than you are making today if you could do so without adding significantly to your operating expenses by doing so?”

We ask this because this is precisely what a project accounting solution could do for you and your firm.

Chances are your client’s aren’t stupid. They know that a good and effective project manager is more valuable to them than a heads-down programmer or a project secretary or, perhaps, a QA staffer. Right now, you are likely charging the same for each of these, which mean you must be using an “averaged” rate.

By adding project accounting’s flexibility, you are also adding the low-cost option of further segmenting your market and closing more deals. You can charge clients more or less based on how your crack sales team identifies the prospect’s or client’s view of “value.” Two projects that are virtually identical in their execution may have two significantly different values to two distinctly different clients. Consider the following chart:

Project ID

Est. Project Cost

Est. Project Revenues

Est. Project Profit


$ 165,000

$ 260,000

$ 95,000


$ 165,000

$ 220,000

$ 55,000


$ 165,000

$ 200,000

$ 35,000

Here we see virtually identical projects on the “cost” side. However, three different clients perceive the “value” of the efforts differently in their businesses. One is willing to pay $260,000 for the work; another is willing to pay $220,000 for it; and third sees only $200,000 in value and won’t pay a cent more.

If your PA system only allows you to charge these clients one rate—or if you don’t want to burden your accounting department with manually managing different billing rates per client—you may be tempted to turn down Projects ‘B’ and ‘C’.

Why give up the profits?

But, if your firm has the capacity to do projects ‘B’ and ‘C’, and no more profitable project prospects stand in your way, why would you turn down an extra $90,000 ($55,000 plus $35,000) in project profits simply because your accounting system makes it too difficult to manage. (Actually, that is not the reason such profits are all too frequently passed by. Instead, it is because executives and the sales team—hemmed in by preconceptions about their accounting limitations—never think of making these offers. Instead, they offer their ‘bids’ using the firm’s standard costs and markups and end up losing the deals for Projects ‘B’ and ‘C’.)

Leveraging new capabilities for new profits

In short, leveraging the new flexibilities delivered by a project accounting solution may allow your firm to dramatically increase revenues and profits through market segmentation. However, doing so means bringing to your firm new ways of thinking (as seen above) and an understanding how newly delivered capabilities can, in fact, be applied to create new markets or extend existing ones. This means finding the right implementation partner is essential.

It is imperative that you not make the common mistake made by some many executives and managers when considering the purchase and implementation of project accounting software. Typically they spend more than 90 percent of their time and effort in what the process of “software selection,” carefully considering a long list of features and functions. Then, when this is all done, they simply take whatever consulting firm and consultants come along with the software. We believe this is a wrong-headed approach and many firms to make investments in software with little return on their investment.

There are three critical aspects necessary for a project accounting implementation leading to rapid and high return-on-investment:

  • The ability to unlock “tribal knowledge”
  • The ability to reduce complex problems to simple solutions
  • The ability to help your organization “design” new ways to leverage new capabilities for increasing throughput and profit

If the software reseller cannot bring to your firm these critical elements, perhaps you should look elsewhere.

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