How do you set up effective project accounting?

Project accounting is concerned with how project costs are accounted for and tracked. It provides an accurate measure of a project's financial performance, and enables project managers to make informed decisions about what actions to take to stay on budget.

Project accounting can also help identify potential risks and assess the risks to a project's margin.

In short, it is an essential component of any good project manager. Before going into detail about the steps involved in setting up a reliable and efficient project accounting system, it's important to review the main concepts.

How does project accounting work?

All project accounting involves establishing a provisional budget at the start of each project. This budget must include all costs to be allocated to the project, i.e. :

• times worked on the project ;
• purchases required for production ;
• additional costs.

It must allow you to anticipate a margin. Throughout the project, the budget will be regularly reviewed, and the projected margin calculation redone, to ensure that the project's financial performance is on track.

It is important to keep records of costs incurred on the project (timesheets, expense receipts, invoices, etc.), and to be able to justify forecast costs (future project planning, etc.). Indeed, since these costs are a central element in the accounting calculation (detailed below), you need to be able to explain and justify that the calculations comply with accounting rules.

When creating a project budget, it's important to include all cost items. You need to take into account the time to be spent by internal resources, purchases of external services (from freelancers, for example), travel expenses - even those that will be re-billed, and the possible purchase of products that will be resold during the course of the project.

Project accounting - Production planning in Stafiz

Choosing the right sales recognition methodology

There are several methods of recognizing sales in project accounting.

To make the right choice, it's best to get in touch with your chartered accountant, who can explain the ins and outs of the different methodologies and help you choose the right ones for your specific projects.

However, here are the main sales recognition methodologies and associated rules.

Recognition of sales on completion

In this methodology, sales are not recognized until the project is completed.

All project-relatedsales are recognized in the current period when the project is officially completed. It will not be possible to recognize sales before this period.

For a project to be properly "completed", the customer must confirm that the service for which he placed the order has been carried out in its entirety. This can be done, for example, by means of a delivery note validated by the customer.

Recognition of turnover upon advancement

For longer projects, it may be acceptable in accounting terms to recognize sales as the project progresses.

At the end of each accounting period, the percentage of completion is calculated, and sales are recognized on a pro rata basis.

In this case, the method used to calculate progress must be precise and consistent if sales calculations are to be valid. Progress is often calculated on the basis of costs.

This makes it possible to calculate progress more accurately than a simple calculation based on work performed. Indeed, when the project budget includes not only work carried out by internal collaborators, but also purchases and external services, it must be possible to include exhaustive monitoring, and the common criterion of cost works well.

Recognition of sales on invoicing

Where project accounting permits, the method of recognizing sales on invoicing implies that sales are aligned with invoicing.

Sales recognized over the period will be equal to invoicing generated over the same period. For projects invoiced on a time-spent basis, this is often the methodology chosen to simplify calculations.

Correctly calculate project progress with a project management tool

When project sales are recognized on a percentage-of-completion basis, you also need to choose the right method for calculating progress.

For an advance to be correct, several criteria must be met.

If the projects are straightforward, and the progress of the work in time makes it possible to accurately define the percentage of project completion, the method can be accepted by the chartered accountant or financial auditor.

On the other hand, when projects are complex, with different cost lines and product purchases, a cost-based methodology will probably be preferable. It is therefore necessary to put in place processes which, at the end of the accounting period, enable :

• retrieve precise cost data for each project (manpower costs, external services, expenses, etc.);
• enable project managers to re-evaluate the remaining work to be done on the project, and therefore the total budget, so that progress can be calculated as a percentage.

An ERP or project management tool enables you to perform these calculations easily, and simplifies budget tracking, updating and closing. Project accounting is more easily deployed with an ERP solution.

How to calculate project margins correctly

In proper project accounting, the calculation of the project margin must be precise, and must take into account all project variables.

Calculating sales

The first key element in the margin is the calculation of sales, from which project costs are deducted. This will vary according to the sales recognition methodology used.

Depending on the type of project, your ERP software is normally correctly configured to apply the correct sales recognition methodology.

This means that sales on fixed-price projects are recognized either on completion or on a percentage-of-completion basis.

Project sales are more likely to be recognized on an invoiced basis. If costs, purchases or subcontracting are re-invoiced, this must be taken into account, as these elements are added to the project's sales.

Taking costs into account

3 important criteria: there must be

For a project's profitability to be accurately calculated, three criteria must be met:

• completeness of costs ;
• that these costs are real, i.e. that the amounts are not estimates but actual costs;
• that they are recorded in the correct accounting period.

Make sure your tracking software allows you to meet these conditions.

For the sake of completeness, we therefore need to take into account personnel costs (time spent on the project multiplied by the associated cost), purchases of services (costs invoiced by a freelancer, for example), expenses (travel and travel expenses), as well as purchases of products and materials.

Reliable costs depend on your ERP or business management software. The more integrated it is, the more reliable your processes and costs will be.

Recording in the right accounting period also means setting up processes that require project managers to track costs and ensure that they are all recorded on the right dates.

What can be done to improve margins?

Project accounting helps define the rules for proper project management. But each company has a certain degree of freedom in its analytical approach.

For example, project margins can be broken down into two lines to refine performance analysis. A first level of margin, called gross project margin, includes so-called external costs: purchases, expenses, etc. They do not include the company's payroll costs.

To go from gross margin to net margin, we add to the costs the amount corresponding to the wage cost to the company of the time spent by internal collaborators on the project. A tool for tracking time spent on projects and tasks is required for this calculation to be accurate.

To improve margins, all you need to do is implement a series of actions.

Tracking margins

And yes, it sounds silly, but you can only improve what you track. But too few companies track their project margins precisely. By setting up a precise and regular follow-up of margins, performance will undeniably improve, as the follow-up will provide visibility on the problems that impact projects.

Empowering project managers

They're the ones who have to be responsible for their margins. By giving them the means to know automatically how their margins are evolving, and the access to update the remaining work on the project, you can certainly count on them to stick to the budget.

Gaining in anticipation

Software that enables you to better manage cost forecasts and link them to the monitoring of actual costs gives you a head start. Stafiz, for example, enables you to monitor employee workloads and future costs, and notifies you when margins deviate from projects.

Do you have questions about your project accounting and, more generally, about project financial management? Don't hesitate to contact our experts, who can help you make the right changes in your company!

Stafiz is an ERP for service companies, enabling you to manage your projects more effectively. Automate your processes and save time. Gain global visibility of your project performance!

To find out more about the Stafiz platform, request a demo.

Request a demo