What is Project Accounting Software and Why Do You Need It?

There are hundreds of accounting software solutions available in the market, at different price points and with different brand promises. 

You might wonder which one is right for you - or whether or not you should take on a project accounting software solution, instead of a general one.

It’s a relevant question, and one that deserves exploration. In simplest terms, general accounting software offers a broad view of a company's overall financial health 

While it handles essential functions like accounts payable, receivable, and payroll, it doesn’t have the capabilities you may need to manage the finances of a project, like resource allocation and cost tracking.

Project accounting software specializes in the financial management of individual projects. They offer a granular level of detail, allowing businesses to track costs, revenue, and profitability at the project, phase, and customer level.

This focused approach enables more precise budgeting, forecasting and performance measurement. Let's take a closer look!

What Is Project Accounting and Its Benefits?

Project accounting is a specialized form of accounting that tracks all financial aspects related to a specific project. 

Unlike general accounting, which deals with the overall financial health of a business, project accounting focuses on tracking a project's costs, billing, and revenue. 

It provides project managers with the tools to monitor direct costs, overhead, and revenue, ensuring that the project stays on budget and financial goals are met.

Project accounting involves creating a detailed plan at the beginning of the project, outlining all anticipated costs, and having methods in place to track and manage those costs throughout the project lifecycle. 

This includes monitoring expenses related to the project team, equipment, external services, and other resources.

Project Accounting vs. Financial Accounting

So, how are the two tools different?

One key difference between the two is the time frame they focus on. Project accounting is concerned with the financial performance of a particular project within its defined timeline, whether it's a few months or several years.

 In contrast, financial accounting provides an overview of the organization's finances over set periods, such as quarterly or annually.

In terms of reporting, financial accounting follows generally accepted accounting principles (GAAP) and is standardised across the organisation.

Project accounting, on the other hand, is more flexible and tailored to the needs of each project. This could mean focusing on specific costs, such as materials or labor, depending on the project's requirements and goals.

Finally, project accounting offers the ability to customize processes to fit the unique needs of each project, allowing for greater flexibility and precision.

In contrast, financial accounting is governed by the Financial Accounting Standards Board (FASB) and must adhere to strict regulatory standards across the entire organisation.

How Does Project Accounting Work?

Project accounting works by budgeting at the beginning of the project and continuously tracking costs and revenue throughout its execution. The main components of project accounting include:

• Budget creation: Define all costs associated with the project, including labor, materials, and external services.
• Cost tracking: Monitor actual costs against the planned budget and adjust as needed to stay on track.
• Revenue recognition: Determine when to recognize revenue based on project progress or completion.

Project managers and accountants use this detailed financial tracking to ensure that the project remains financially viable, making adjustments as necessary to avoid budget overruns and stay within financial limits. 

Benefits of Project Accounting

Project accounting can set your entire project up for success by providing real-time insights into its financial health through reliable financial metrics.

By thoroughly tracking costs, revenue, and project progress, project accounting helps you maintain control of your budget and ensures that your project remains profitable.

It enables project managers to monitor key financial indicators, such as completion rates, margins, and unbilled production, which are essential for making informed decisions.

With accurate project accounting, you can quickly identify any deviations from budget and take corrective action to mitigate risks

This level of financial oversight helps in forecasting future costs  and revenues, allowing for better planning and resource allocation.

Ultimately, project accounting ensures that your project is completed within the set financial parameters, contributing to its overall success and profitability.

These benefits are felt in different ways.

• More accurate financial data: Project accounting provides detailed insights into the financial performance of individual projects. This enables project managers to make informed decisions, ensuring that the project remains profitable and within budget.
• Better resource management: By tracking costs related to labour and materials, project accounting helps in optimising resource allocation. This ensures that resources are used efficiently, reducing waste and maximising productivity.
• Better budget control: With real-time tracking of expenses and revenues, project accounting allows for better control over the project budget. This helps in identifying any financial issues early, enabling quick corrective actions to prevent budget overruns.
• Better project planning and forecasting: Historical data from previous projects can be used to improve planning and forecasting for future projects. Project accounting provides a clear picture of costs and revenues, helping to create more accurate budgets and timelines for new projects.
• Risk identification and mitigation: Project accounting helps in identifying potential financial risks early in the project. By closely monitoring costs and revenues, project managers can anticipate issues that might affect the project's financial health and take steps to mitigate them.
• Improved decision-making: With access to detailed financial data, project managers can make more informed decisions about resource allocation, project timelines, and other critical aspects of project management.
• Transparency and accountability: Project accounting ensures that all financial transactions related to the project are documented and transparent. This increases accountability among team members and provides stakeholders with clear visibility into the project's financial health.
• Increased profitability: By closely monitoring and managing costs, project accounting helps in improving the overall profitability of the project. It ensures that all financial aspects are aligned with the project's goals, leading to better financial outcomes.

What Criterias Should You Look For When Choosing A Project Accounting Software ?

There is no one-size-fits-all solution when it comes to project accounting software. Make sure that you evaluate the potential solution based on your business goals, software needs, and other criteria unique to your business.

It's essential to choose project accounting software that supports your business's financial and management goals.

Business-Related Criteria

Understanding your business needs is paramount. The software should align with your management control requirements, helping you effectively monitor and control project performance. (Read more about this in our article on management control).

Ideally, your project accounting software solution should:

• Support your overall business goals: This includes improving project profitability, optimizing resource utilization, and delivering projects on time and on budget.
• Meet the requirements of your industry: For example, industries like consulting, engineering, or construction might require specialized features for time tracking, resource management, or compliance with industry regulations.
• Fit your budget: Consider the total cost of ownership, including licensing fees, implementation costs, training, and ongoing maintenance.
• Support decision-making through analytics and reporting: This includes information on project performance, financial health, and resource allocation, allowing management to make informed decisions.

Don’t just focus on the features. It has to be a good fit for the company as a whole. 

Software-Related Criteria

Next, consider the project accounting software integration requirements.

Customization and scalability

Ensure the software can be customised to meet the specific needs of your projects and organisation. The ability to tailor the software to your unique workflows and reporting requirements is crucial. 

Choose software that can grow with your business. As the number of projects increases and their complexity evolves, the software should be able to scale without compromising performance.

Communication and collaboration

Your software should facilitate seamless communication and collaboration between finance, project management, and other departments. 

Project accounting software easy to use  ensures that everyone is aligned and working towards common goals. It should make it easy to communicate project financials through easy-to-understand reports to those who need it, including project sponsors and other stakeholders.

Integration with other systems

Look for software that  integrates smoothly  with other enterprise systems such as ERP, CRM, and procurement systems.

This prevents the creation of data silos and ensures a holistic view of your project finances. 

The software should maintain consistent and accurate data across different systems, reducing the risk of errors and ensuring all teams are working with the same information.

Extra Criteria

Finally, consider the criteria that will make your team more efficient and make it easier to use the software.

Cloud-based solution

Cloud-based project accounting software allows for easy collaboration, on-the-go access, and supports hybrid teams. This flexibility is increasingly important in today’s dynamic work environments.

Compliance for Data Privacy and Security

The software must protect sensitive financial data  from unauthorised access and breaches. It should ensure that data is regularly backed up and can be quickly recovered in case of a system failure.

Legally Fitted for Audits and Tax

Ensure the project accounting software complies with relevant financial regulations and standards (e.g., GAAP, IFRS).

This compliance is critical for audits and tax purposes, reducing the risk of legal issues.

Software Editor Services

Look for a software provider that offers adequate training to users, ensuring they can effectively use the software. 

Make sure that your project-based accounting software firm has support and customer service available, especially during the early implementation and adoption face..

Whether you are managing construction projects, running a healthcare practice, or operating a small business, selecting the right project accounting software is crucial for your success.

Project accounting software is specialized financial management software that focuses on tracking cost, revenue, and profitability at the project level, offering more detailed information and control than general accounting software. It allows for accurate budgeting, forecasting, and performance measurement , which is crucial for staying within budget of projects and ensuring profitability. The software supports better resource management, risk identification, and decision-making, while ensuring compliance with financial regulations.

When choosing project accounting software, it's essential to consider both your business-related needs and software capabilities, such as customisation, scalability, integration, and data security.