Project Accounting for Dummies
The definition of a successful project usually includes an expectation for project to be delivered within budget. In this blog I look at some of the key considerations for a project manager.
As a starting point, I’d summarise the aims of project accounting as follows:
- To identify deviations from the project plan and budget
- To ensure good corporate governance exists over project spending
- To ensure timely reporting of spending and projections for future spend
These can be subtly different from the aims of traditional accounting. For example project accounting is frequently forward looking, whereas traditional financial accounting typically looks at how historical costs are recorded.
The foundation for project costs is an approved budget of estimated costs that forms part of the underlying business case. This is usually developed from a number of assumptions and estimates. It’s important to translate the budget into a suitable structure of cost accounts so that costs can be recorded and in a logical manner. The precise structure required for cost accounts varies depending on the size and complexity of the project but it’s common for costs to be split either by project phase (planning, build, test etc) or type (Internal staff cost, external staff cost, hardware etc). A key requirement is to ensure that each cost account has a suitable owner who is responsible for approving spend and reviewing regular cost reports for the cost accounts under their control.
Project cost reporting needs to be timely and accurate. It’s useful to split costs into the following categories:
- Actual costs incurred to date
- Costs that have been committed but not yet paid
- Estimated further costs to project completion
The analysis of variances to budget is an extremely useful exercise for a project manager. If costs are lower than expected this may indicate lower levels progress than planned. If costs are higher than expected it may indicate productivity issues or false assumptions. Good project governance requires material variances to be approved by the relevant party.
This blog has set out some basic principles for project accounting and isn’t intended to be an exhaustive description. The key to successful project accounting is applying the correct techniques in the right circumstances.
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