Project Cost Accounting

The complete guide to cost accounting in project management

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"Is our project profitable?"

It’s the question on every services organization’s mind. But oftentimes, they don’t ask it early enough. Until it’s too late.

Studies have shown that most projects fail primarily due to three major reasons: poor management, inadequate planning, and runaway costs. No big surprise here. And without a doubt, the inability to contain costs is a direct result of the aforementioned deficiencies in leadership and forecasting.

One way of shifting the odds in your favor is by using a project accounting system.

Cost accounting on the project level puts together all project based financials into one centralized and unified dataset that is readily available not only to the project manager, but to the entire project team.

With increased visibility, real time updates, and easy access to relevant data, project managers can avoid fatal errors and navigate project financials more smoothly to reduce losses, deliver on-schedule, accomplish their goals, and achieve their anticipated revenues.

Why use cost accounting in project management?

Let’s begin with two words: scope creep.

While this is not a common response to the question of why you should implement project cost accounting, you’ll be surprised that all roads will eventually lead to scope creep if you don’t.

Scope creep is the tendency for projects to take up additional requirements or tasks that are not in the agreed scope of work.

The PMBOK® Guide describes scope creep as "adding features and functionality (project scope) without addressing the effects on time, costs, and resources, or without customer approval." Experts further state that scope creep is a "dreaded thing" because it wastes money, decreases satisfaction, and derails expected project value.

Any project manager knows from experience that all those small, sneaky changes in scope will eventually weigh down schedules, inflate costs, and get in the way of assigned tasks that were initially projected to complete the project.

These unexpected alterations can happen at any time and disrupt your entire project strategy because they require additional resource, time and cost. All of these will bring about in unplanned expenses which were not accounted for at the beginning.

But you want to impress your client and maintain a positive, so you oblige them the extra task or two. Or three. Or more.

What does controlling scope creep have to do with cost accounting?

Look at it from the point of view of profitability: more services should mean more money. But if you don’t keep track of all the day to day project financials – particularly those directly associated with expended time, labor, and materials – your ability to make strong, data-driven decisions is impeded. In addition, without a detailed record of all the resources taken up by the extra work, how can you charge for additional services and their concomitant fees?

Admittedly, managing scope creep isn’t a top-of-mind reason when considering why you should implement project cost accounting, although you might be surprised at how much it can adversely affect efficiency and cost-effectiveness if left undetected and unchecked.

Every deliverable or expected output should be assigned a cost, which goes into the project budget. With project cost accounting, it will be easier to perform real-time budget analysis midway or closer towards project completion to make sure that spending is still on track. And if it’s not, make critical and informed decisions before that sneaky scope creep snowballs and turns into a major setback.

Managing -- or better yet, avoiding -- time and cost overruns ensure increase in revenue from every client, as well as a happier, less stressed, more productive project team.

Benefits of project cost accounting

Now onto the more conventional reasons why cost accounting helps project management.

Unlike the more comprehensive coverage of standard financial accounting practices, project cost accounting specifically monitors financials and other activities at the client engagement level at any given time.

There are numerous benefits to be gained from project-based accounting. Here are a just a few:
  • Project cost accounting pulls together and records incremental day-to-day revenues, costs, and other valuable financial data relevant to the project so you can immediately detect if the project is sailing smoothly or if you have to plug some leaks.
  • When set up properly, a project accounting system can provide comprehensive surveillance and management of all aspects of the project -- from labor and material, to delays and revenue leakages. As the facts and figures are collected on a day-to-day basis, key decision makers will have access to critical data that they can refer to at any given time.
  • Cost accounting helps to reduce project costs and contributes to overall project efficiency by giving you greater control over time, labor, material, and supplies. It helps you pinpoint which activities are profitable and which ones are not. It reveals the relative proficiency and productivity of team members. It also streamlines processes that enables you to identify waste factors, investigate their causes, and apply the appropriate steps to mitigate them.
  • In professional service organizations where projects comprise the lifeblood of company activities, using a project management solution with robust accounting software (such as time and expense tracking) will also help the team by automating routine tasks, as well as tracking and consolidating all their project-related transactions in a central location in order to provide quick, accurate data for billing purposes.

What activities are included in project cost accounting?

Activities expected of project managers and project accountants when doing cost accounting at the project level include:
  • Creating a project cost accounting system (also referred to as a cost center) dedicated to project-specific transactions, with data that includes but is not limited to resources, revenues costs, assets and liabilities, and other items identified and allocated to the project.
  • Maintaining project ledgers that clearly illustrate the Work Breakdown Structure (WBS) line items. The WBS helps in creating a realistic budget by capturing the cost associated with each and every resource and activity approved by the client. For cost accounting to yield valuable data, these project costs need to be recorded and tracked regularly and accurately. All other commitments, expenditures, and forecasts also need to be incorporated.
  • Ensuring that the integrity of the project budget by securing approval for any scope changes, fiscal changes, or contingency allocations.
  • Providing financial reports at regular intervals, often done with increased frequency as the project approaches completion.
  • Forecasting of costs based on the defined and approved scope that was used to create budget estimates. This forecast has to be regularly updated as the project progresses and moves towards completion. We cannot overemphasize the fact that failing to stay on-budget is one of the main reasons behind project failure.

Turning every project into a profit center

With the multiple hats that project managers have to wear these days, using a powerful and reliable project management solution with project accounting tools, such as time and expense tracking software, have shown numerous advantages in lightening up the load for both project leaders and team members.

Initially, TeleTracking Technologies, a healthcare patient solution provider, used a variety of disparate systems and to address their project management needs. However, as the company grew and their clients’ needs became more complex, using different solutions created numerous challenges that slowed down their everyday business processes, including insufficient time tracking practices, unclear understanding of resource utilization, and difficulties in forecasting capacity.

Shortly after making their big shift to Mavenlink, TeleTracking saw dramatic changes in their overall financial performance: 100% time tracking compliance, 13% increase in hours within the first two weeks, 18% increase in hours to date, and 37% increase in billable utilization.

Resource manager Jane Everett Goering observes: "Being able to finally have this ecosystem with Mavenlink where we could look at our resources as a whole and see where they were deployed, what they were focused on, what skill sets we had available, balance out the workload for our resource pool, and the forecast was a huge opportunity."

Mark Munson, Director for Client Delivery, agrees. He says that Mavenlink stood out "for the capabilities that they had across resource management, project management, ease of use, user interface, and the ability to have an analytics engine with critical insights. The insights reports were really a key differentiator."

If you’re in the market for project accounting tools, consider the following questions:
  • Does it give you quick and real-time visibility into project financials?
  • Will it provide you with greater control over timesheet processes and workflows to improve time collection, utilization, and billing?
  • Can it help you create estimates and project scenarios that will improve the accuracy of proposals and ensure proper margins are planned into the project?
  • Does it ensure more reliable financial performance by providing actionable information for accurate forecasting and planning?
  • Could it helps you streamline your invoicing process to speed up payment on your work?
  • Can it integrate your critical financial systems seamlessly into a single platform?
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