Failure is More Likely Than Not
An astonishingly high percentage of projects of any kind fail because they far exceed their budget, drag on well beyond their scheduled completion date, or both. Some (33%) fall apart because upper management doesn't provide sufficient leadership or support. Others (44%) fail because they don't have appropriately skilled or experienced managers on site. Four in five aren't successful because there is no clear linkage between the project's goals and the corporation's business strategy.
Not least significant: when asked, the majority of businesses cited their biggest project challenge was accurately capturing its time and costs. Inaccurate or poorly designed project accounting practices are contributors to almost every project failure.
Standard Accounting isn’t the same as Project Accounting
One challenge faced by SME's is that many don't understand the distinction between standard business accounting practices and project-specific accounting practices, so they also don't understand the power that today's project accounting practices offer. Standard business accounting tracks the totality of expenses and revenues across the corporate entity, usually on a fixed-time basis (such as quarterly, monthly, etc.).
Project-specific accounting, however, monitors the financial and other activities of individual projects, whether they are the sole endeavor of the enterprise or just one of many projects the company is pursuing at any given time. The benefits to be gained by using project-focused accounting are numerous:
- Because project accounting records incremental, day-to-day expenses and revenues, it provides critical and immediate information about where the project is succeeding, and where it is not.
- When properly structured, project accounting can provide comprehensive oversight of all aspects of the project, from labor and materials to time delays and contractor inputs. Because this data aggregates on a daily basis, both on-site and corporate leadership can make appropriate decisions as circumstances demand at that moment.
- For service organizations whose workers provide project-based services to other entities, the project accounting software will track their efforts in pursuit of that contract, so both the customer and the employer have accurate data for billing and contract purposes.
In short, project accounting integrates all the separate tools typically used to monitor project processes - the spreadsheets, time cards, invoicing, etc., - into a single, harmonized, integrated dataset that directs decisions and avoids costly errors.
Managing Resources: the Focus of Project Accounting
The goal of every project is to manage the full scope of its resources as efficiently as possible to achieve the highest level of both quality and profit. The goal of the project accounting plan is to ensure the achievement of that corporate goal on-time and on-budget by following and recording each element of the project as it evolves. The project budget is designed to establish parameters for the costs of each element and to track the management of that resource as it progresses through the project timeline. Failing to stay on-budget is the most common cause of project failure.
Every project consumes a unique constellation of resources, each selected because it provides a crucial component to the success of the whole. Resources can be many things, but most are categorized under an aggregate title of "materials," "labor," or "time," with the understanding that there is a financial and budgetary component attached to each resource, regardless of its category.
The nature of the project type determines the scope and volume of the materials used; construction projects will have vast quantities of materials whereas professional consulting projects may have none. Materials of any kind have an initial cost of purchase, as well as ancillary costs, such as delivery, preparation, and installation. If delivery is delayed or if materials aren't available, the cost of the project rises.
Labor is, by far, the most expensive resource in every project, and therefore often also presents the biggest accounting challenge. Some projects may have only one worker, while others can have hundreds, and the efforts of all must be accounted for in the final project budget.
The nature of the work performed often defines how the provider bills their effort, which adds complexity to the accounting process.
- Trade laborers usually charge by the hour, and different trades charge different rates, which may also include an additional overtime rate.
- Professional services providers may bill by the hour, or bill a set fee for the project as a whole.
- Larger projects frequently have workers in each of these categories.
- Large projects may also have subcontractors who bill per their contract, and that contract may have workers paid by the contractor but who generate the work for the primary client.
Project accounting programming tracks the efforts (or failures) of each worker, regardless of their immediate supervisor or the means of billing and connects that resource to the whole project budget.
Time and labor are closely related resources. The ability to deliver a profitable project on-time and on-budget is dependent on a worker tracking their time spent to projects both accurately and promptly. This is one of the key components of project accounting – tracking this data as it happens, so accommodations and rescheduling can occur before costs spiral out of control and project due-dates need to be pushed back. Having a clear picture of how much time workers are spending on projects enables project managers to have a better understanding of how a project is progressing relative to the goals set before it was started.
A 21st Century Bonus - Mobility
Today's project-focused accounting programming also offers flexibility that is unmatched by traditional accounting practices: it gives workers, project management, and the C-Suite the mobility to enter and access data on the fly. Cloud-based project accounting tools connect all project-related data into a single database that is accessible from any mobile device. Workers upload budget or scheduling challenges as they occur, and the cloud-computing capacity integrates that information into its relevant project aspects. At any given moment, leadership can tap into project reports and access the current information they need to make immediate decisions. And communication across the project, regardless of its source or location, is instantaneous.
Cloud-based project accounting also resolves another critical concern that all project developers face: maintaining project and data security. Most project developers are not also IT professionals and must add layers of technical knowledge and tools over those that they use in their primary occupation. When accessing cloud-based project accounting services, all the security, IT maintenance, and computing capacities are the work of the cloud provider, which leaves the project professionals free to focus on their primary task.
Research reveals that most project failures result from poor management, inadequate planning, and the inability to contain costs. Project-focused accounting gives businesses the tools they need to avoid these errors by seamlessly integrating all project elements into a single, harmonious dataset. With the enhanced information and its ready access, enterprise leaders can steer their projects through materials, labor and time challenges to reduce losses and achieve both their anticipated goals and profits.