Project accounting is needed to take control of your budget and resources as well as generate accurate and timely billing. Ultimately, project accounting best practices help in establishing the profitability of all your projects.
In construction and other project-based industries, project accounting is crucial. It gives stakeholders accurate estimates, manages time and resources, generates bills, and tells them if the project is profitable.
Despite its importance, there are still a lot of project-based businesses that do not use project accounting software.
In this article, we’ll define project accounting and share some best practices for contractors. We will also help you ensure profitability for your projects by introducing the right project accounting tools.
What is Project Accounting?
As the name implies, project accounting is accounting focused on individual projects. Thus, it differs from financial accounting in that the latter is more interested in an organization’s overall performance.
Projects, in nature, have specific start and end dates. Project accountants look at financial contracts and ensure that the projects meet the terms. They estimate, forecast, do cost accounting, revenue recognition, and the projects’ cash flow processes.
Good project accountants are also oftentimes skilled in project management.
Other areas that project accountant look at are:
- Availability of resources for new projects
- Budget forecasts based on previous projects
- Realistic start and end dates of a project against time, cost, and resources
- Cost and revenue tracking against milestones and planned costs
- Project issues that affect project profitability
Now, we know what project accounting is and what project accountants do. Let’s head on and take a closer look at some best practices.
5 Project Accounting Best Practices For Contractors
Contractors and anyone working in a project-based industry are well aware of the potential pitfalls in project accounting. Let’s look at how contractors solve common problems with these five project accounting best practices:
1) Managing scope creep
In a project, you can’t always avoid change requests. However, additional requirements will impact the project timeline and budget.
Sometimes, a client might request items that were not part of the original contract. Requests like these usually come up once the project is already moving which makes it all the more complicated.
To lessen scope creep, during the initial stages, discuss the project thoroughly with the client. Keep in mind their vision and their project expectations.
Once you get these information in the discovery process, you can then build them into a project plan. As part of the contract, these project plan and requirements will serve as your commitment to the client.
However, it is still inevitable that changes will occur. Should this happen, establish a formal change request procedure before the project starts. Doing so ensures that you can assess the request and its impacts on the project, resource availability, costs, and milestones.
Be completely transparent with the client regarding the impacts the change will have on a current project. This way, both contractor and client will get to assess the financials, timelines and will keep the project on track.
2) Reducing project risks
As we say, no plan is foolproof. Overlooked details and unforeseen circumstances can derail any project.
Project risks may include the untimely departure of critical project team members or design flaws uncovered during construction. While it would not be sensible to predict every potential issue in a project, you can build contingencies to adapt.
Project managers and project accountants must plan on project uncertainties. They should build contingency into the schedule to provide enough time for rework should any occur.
Successful project accounting involves having the ability to communicate and collaborate with the team. Short but frequent meetings are key to agile project management and help identify problems at the earliest possible time.
3) Accurate budgeting
Knowing your actual costs will help you master the budgeting process and deliver more profitable projects. Construction job costing will get you detailed job information, help determine problem areas, and have accurate budgeting for future projects.
Back when cloud construction accounting software isn’t widely available, typical budget processes relied on guesstimates. This time, with the right toolset, you can secure new business with concrete and accurate costing in labor and materials.
Entering A/P invoices, billing, and charging time to jobs can then be efficiently managed. In addition, the right tools allow for up-to-date job costs and billing information at all times.
Another often overlooked project labor cost is the time spent in project meetings and emails. This tends to add a significant cost burden to the project unwittingly so.
Project accountants are also in charge of tracking said costs. They are responsible for gathering accurate budgets for materials and labor – including equipment costs (rented or purchased) and workers’ hours.
Therefore, project accountants have to make sure that cost projection is accurate and up-to-date as the project progresses.
4) Managing time records
When it comes to financials, accurate time records against a project are crucial. It affects payroll, invoices, productivity, and cost tracking.
Consequently, determining how much time is allocated to a project is very important to see how profitable a project is.
Staff members on salaries are often overlooked in the project budget. Even if they are, the individuals may not keep accurate records of their time spent on a project.
The highest cost in projects often comes from labor. That’s why it is critical to be accurate in keeping track of the workers’ time spent. This way, you will know where you are at your budget, your project burn rate, and where unexpected expenses may occur.
5) Managing project closure
Closing a project is critical for these reasons: 1) it releases resources for use by other projects; 2) it establishes the formal completion of a project; and 3) it signals project accountants to finalize actual revenue, costs, profit, and margin.
There are times when project closure tends to get overlooked or rushed. Issues that affect the project close include lost paperwork, accounting troubles, and inaccurate tracking and billing.
To lessen these complications, establish a process at the outset to track all paperwork and documentation. Also, ensure that you secure the formal delivery acceptance by the client of the finished project.
It is also critical to make sure that all costs concerning the project are updated. Lastly, release availability of all materials, equipment, contractors, and employees for use for other projects.
Project accounting oversees budget management, billing, and project profitability against resources like staff labor and materials. To seamlessly and sensibly tie all these together, make sure you have the right toolset at hand.
Acumatica Construction Edition integrates your core financials: general ledger, accounts receivable, accounts payable, inventory, sales orders, and CRM. It helps project accountants and project managers to keep track of all financials throughout the project.
Request a free consultation for a complete view of project-related costs and applicable tools for your business. Reach out to our team today!