The Right Choice Makes All the Difference

Project Accounting Software Selection Tips

Project software is a tool that is used by many companies to schedule resources, estimate costs, track status and analyze results of their projects. There are basically two types of project software – Project Management & Project Accounting. This page is focused on Project Accounting software. (Please see Project Management Software Selection Tips for more information regarding Project Management.) While there are clear differences in functionality, as project software has evolved, project accounting software vendors have added limited project management functionality to their products and vice versa. Also, it is important to note that due to the team collaboration requirements of both Project Accounting and Project Management software, these solutions have seen widespread acceptance with the Cloud (or Software as a Service) software delivery method. This means that you have many mature software solutions available to you in both the Cloud and On-Premises scenarios.

When evaluating project accounting software, it is important to first understand the level of project accounting functionality that is necessary for your company. Some companies only need to track the cost of a project, while others have sophisticated project accounting requirements that require detailed tracking of both financial and non-financial data. The following outlines the four general levels of project accounting.

Level 1 – General Ledger Account Code. The general ledger can be used to collect project cost by utilizing a segment in the account code to segregate and report on costs attributed to a project. This method works well when you need to track the cost/revenue history of a project without a lot of detail and there are not a lot of complex projects in a year. It is very easy to maintain, and many companies use this method to track capital projects. The drawback is that reporting options are limited because there is no information collected on the non-financial data of a project and projects cannot be broken down into tasks and subtasks.

Level 2 – Job Cost. Job cost modules allow the tracking of both financial and non-financial data, as well as personnel and hours worked on a project. It has more detailed budgeting functionality that includes comparisons of non-financial data. Materials used in a project can be tracked and allocated over multiple projects. Job cost reports provide a detailed breakdown of a project, but it still has very limited revenue recognition, workflow management, resource scheduling and project realization data. The most widespread use of the job cost method is in manufacturing environments, but some smaller construction, engineering, and services organizations that do not have complex project requirements also use it. Job cost offers more project details than the General Ledger account code method can provide, but is not as robust in functionality as project accounting or professional services automation.

Level 3 – Project Accounting. Project accounting modules offer enhanced project tools, including the ability to shift from a historical view of a project to proactive management. Data can be entered and gathered by many different modules such as timekeeping, payroll, purchasing and fulfillment. Other tools available to project managers include deep project hierarchies, project budgeting, encumbered costs, contract management and materials management. In addition, revenue recognition, billing and labor management details are handled by the system. This tool enables management of projects from a budget through detailed project data where many people are working on the same project and being held accountable for the areas in which they operate. The tracking of this information requires more discipline than job cost, as it requires more data input and maintenance, but the visibility of what is actually happening on a project is much greater. The drawback is that resources and scheduled tasks provided by project management software are still disconnected from the project accounting.

Level 4 — Professional Services Automation. PSA software is the most sophisticated level of project accounting. It offers project accounting software with additional management tools either built in to the application or very tightly integrated. These tools track the entire lifecycle of a project and include: Financial Accounting, Customer Relationship Management, Project Management and Resource Scheduling, Document Management, Time and Billing, etc. This software works best in professional service organizations where deep functionality and tight integration of all the functionality of project software is required. Although this requires significant discipline to maintain all of the data elements that are required, the power of PSA is that it makes the difficult connection between the when, the who, the how, the what, and the cost of a project all in one application. This provides executives and project managers a complete view of what is going on in a project and multiple projects, and the tools to manage these projects.

The following are some key areas of functionality that you should consider as you evaluate your project accounting software options:

  • Contract Management. Contract management is the ability to manage a contract through the life of a project or multiple projects. Special pricing and billing agreements may be negotiated and the software may need to manage these billing agreements throughout the project. Integration to billing is an advantage in this situation. Contract addendums and modifications are also tracked and variance alerts can be set up. Warranty contracts also can be maintained and tracked by customer and product, including reason codes and Return Materials Authorizations (RMA). This functionality is very important to companies with many long-term contracts since each client may have unique terms, making it very difficult to track and maintain.
  • Subcontractor Management. Many project-based companies work with subcontractors. Subcontractor management allows the ability to track the “sub’s” work, including multiple jobs for a subcontractor and multiple subcontractors for a job. Payment terms include retainage, hourly, contract, time & materials, cost plus, cost-not-to-exceed and others. The construction industry has heavy requirements in this area.
  • Project Budgeting. Project budgeting offers the ability to set up a budget with fixed and variable costs. This functionality allows the budget to be created at the project level with all of its related expenses, materials and expected revenues. This is more detailed than budgeting in the general ledger. Budgeting functionality may include creating “what-if” scenarios and baseline budgets. Another key component to project budgeting is the ability to track multiple budgets and changes to a budget for a project.
  • Project Types. Project software has the ability to handle multiple types of projects. Examples of these project types include: time and materials, fixed price, cost reimbursement, unit cost, cost plus, cost-not-to-exceed, and other types of projects. This functionality is very useful for companies that have dynamic project environments where multiple types of projects are set up.
  • Time Collection. Many vendors are offering electronic timesheets that can be entered over the Internet via a web browser. This enables time to be entered no matter where the employee is located. Secure online routing of timesheets and approvals have made the process of approving timesheets a real-time activity. This also allows updates to the overall project to happen quickly. Some vendors offer timekeeping functionality that will clock in/clock out employees online. Some vendors also offer time entry via cell phones and other mobile devices. Time is a limited resource in a project, so the ability to instantly capture accurate project labor information is critical for a project manager
  • Billing Rate Management. Some project-based companies have requirements for multiple billing rates for each employee depending on the job function that employee is performing. Other requirements may be special contract billing rates for a particular project or geographic location. Project software that maintains this information makes the billing process more efficient.
  • Expense Management. Online expense forms can be approved and linked to accounts payable or a third party payment provider for reimbursement. Travel management capabilities include premium and expense tracking, travel advances, cash receipts, and multi-currency functionality. This streamlined expense reimbursement process reduces the cost of managing employee expenses, while at the same time providing much faster reimbursements to employees.
  • Financial Accounting. Financial accounting software that is tightly integrated with project software offers several advantages. First, this integration eliminates the need for re-keying of project data into the financial system or developing costly custom integration. It also allows access to the project identifiers and deeper tracking of project data. For example, within a project there may be several phases, activities, and tasks that project focused financial software will track at all levels. Strong project integration with financial software gives accounts receivable personnel the ability to view the status of a customer’s project. They then have a better understanding of the reason for the late payment of an invoice.
  • Revenue Recognition. The billing cycle may or may not match the recognition of revenue for a project, which necessitates revenue recognition tracking functionality. Project accounting software offers the ability to track multiple revenue recognition options for each contract. This includes the ability to track down payments, retainers and progress payments while spreading the recognition of that revenue over the life of the project.
  • Allocations. Allocation of overhead and other indirect costs to a project or multiple projects is a very important function for project software. This includes the ability to create allocation formulas that can be applied to any cost or revenue. These allocations enable more accurate project profitability analyses.
  • Encumbrances. There are two types of project encumbrances: hard and soft. Hard encumbrances are funds that cannot be used for any other purpose. Government projects frequently are classified as hard encumbrances. Soft encumbrances are funds that are earmarked for a particular situation, but allow the use of the funds for other purposes. This capability offers flexibility to adapt to the requirements of your situation.
  • Materials Management. Materials management includes such things as forecasting, procurement, receiving, product assembly, inventory control, warehouse management, fulfillment, shipping, and logistics. Some project software has light Materials Resource Planning (MRP) manufacturing software, including kitting and product routing. This functionality is especially useful for distribution companies with project requirements, and service and repair vendors that need to track repair and replacement parts, as well as service orders for installation and repair.
  • Billing. Project software offers flexible billing capability including the ability to bill and track down payments, retainage, progress payments against the contract, percentage of completion by deliverable, milestones, time and materials with fixed hourly rates, cost plus, contracted pricing, and price per unit. Most project software vendors also offer flexible invoice formats that allow adjustment of the invoice for client or customer specific requirements. For professional services organizations, billing can be linked directly to time collection for automatic billing after timesheets are entered. Construction companies are required to conform to specific AIA billing formats. Government contract billing also has unique characteristics and formats. The flexibility of invoice formats offered by project software enables a billing process and format that will meet the requirements for your specific industry.
  • Project Analysis. Key reports for project analysis include Earned Value Analysis (EVA), budget to completion, budget to actual, project status, realization reports, job cost tracking, revenue stream analysis and profitability analysis. This information is important for evaluating project results and developing better estimates for future projects.

If you have additional questions regarding evaluating project accounting software, or would like to discuss any project accounting software vendors you may be considering, please call us at (425) 216-4030.

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