Oracle Project Accounting Introduction

Project accounting, also known as project cost accounting or project based accounting, is a type of accrual accounting that measures revenue, cost, and profitability of a project or portfolio of projects. Project accounting is a particularly critical practice for professional services firms as they deliver projects to clients as their core business.

Project accounting is a method that services organizations use to drive outcomes for projects and portfolios of projects. Now that we understand what is project accounting, it can also be helpful to be aware of the many terms project Accounting might also be referred to as. For example:

• Job Accounting
• Job Tracking
• Project Accounting
• Project Management Accounting
• Project Accounting Sub-Ledger
• Project Accounting Software
• Financial Statements for Project Management
• Project Management Financial Tracking
• Project Cost Accounting
• Project Based Accounting
• Job Cost Accounting
• Cost Accounting

Beyond the concept of what is project accounting, there are a ton of other accounting terms to distract you, such as ASC 606 compliance, GAAP, revenue recognition, AR, AP, GL, WIP revenue, deferred revenue, accrual, cash basis, and more.  Don’t worry about any of these (yet), by the end of this post you will understand the basics surrounding what is project accounting and be able to put the accompanying terms into practice quickly.

Who Uses Project Accounting?

Typically, project accounting is used by Professional Services Organizations (PSOs) that use an accrual-based accounting method.  This typically means these organizations are over $5M in annual revenue (otherwise organizations may use the cash-based accounting method). A PSO would use project accounting if they are:

1. People-centric, meaning they sell their time as a product
2. Project focused, meaning their work has distinctive start and end points
3. Selling different contract types, including fixed price, time and materials, not to exceed etc.
4. Focused more on labor than material factors (project accounting can sometimes deal with materials and inventory)
5. Delivering work in different global locations
6. Delivering knowledge-based services
7. Delivering projects with a variety of resources and workstreams

Good examples of organizations who use project accounting:

• Tech implementers
• Systems integrators
• Management consulting firms
• Accounting firms
• Creative agencies
• Engineering services
• Digital agencies
• Software companies implementing their own technology
• Architecture firms
• Financial services organizations

What Are the Benefits of Project Accounting?

When thinking about why you might want to use project accounting software, there are a five key benefits that you get to enjoy when implemented:

1. Profitability: Macro and Micro Visibility
   “Watch your pennies and the dollars will take care of themselves” is something that was coined (sorry for the pun) by William Lowndes a former secretary to the treasury of Great Britain.  That concept holds true for project accounting.  If each project is well-managed, the overall performance of the organization will take care of itself.  Project accounting gives us the ability to manage both the macro and micro details of the organization and any given project, allowing us to gain a clear understanding of project profitability.A project profitability analysis is an analytical construct that can be easily achieved using project accounting software. A project profitability analysis compares the revenue generated by doing work for a customer vs. the cost to the organization for delivering the services.
2. Proactive Data-Driven Decisions
   With newfound visibility from project accounting systems comes the ability to make informed decisions. If a project is risking a budget overrun, the project manager can impact the success of the project with scope and resource changes.  Quick decision-making through data-driven insights helps to separate the only okay and great services organizations.
3. Balanced Project Comparison
   If every project manager comes up with their own method to manage project costs, billing and revenue, there is no way to compare how projects are doing collectively across the organization. Creating a consistent structure allows for better overall measurement of your organization.
4. Higher Customer Satisfaction
   No one wants to tell a customer about a budget overrun.  Using project accounting, services organizations can get in front of overruns and major risk points.  By forecasting revenue and costs, client management and transparency becomes much easier and surprises get eliminated. Beyond that, by eliminating overruns resources get freed up for faster staffing to the next project, thus optimizing your billable utilization.
5. Better Resource Management
   Undoubtedly, the most important part of any services organization is people.  Leveraging project accounting allows for the macro view of demand capacity planning. No one wants to refuse a project due to lack of bandwidth, but with project accounting, your organization is fed a proactive, forward-looking resource plan.

Subledger Accounting (SLA) controls the creation of journal entries by accepting the accounting events entered in sub-ledger applications and interfacing with General Ledger. SLA allows configuring the delivered accounting events to modify the accounting interfaced from the sub-ledger applications, such as overriding individual segment values in the account combinations. In addition, you can utilize SLA to assign additional journal lines to the accounting event and interface those to General Ledger.

Many companies will want to account for the Burden portion of the Total Burdened Cost amount separately from the Raw Cost Amount basis. However, they chose to implement Total Burdened Costing instead of Burden as a Separate Expenditure Item because they wanted to apply burden to their forecast financial plans. Therefore, only the Total Burdened Cost is supported for automatic calculation in the forecasting functionality for burdening the forecast.

Subledger Accounting is utilized to offset the raw cost amount from the Total Burdened Cost journal entry to accommodate this requirement. Because Subledger Accounting allows the creation of additional journal lines with an existing accounting event, but the amount cannot be overridden, the offset to reverse the raw cost amount from the journalized total burdened cost amount is accomplished by creating additional journal lines on the basic cost journal entry. This other journal will be generated in Subledger Accounting, not in Projects. Therefore, the configuration is completed in SLA; there is no configuration impact on Project Auto Accounting.

The following example is a modification to the sub-ledger accounting rules for the Labor Cost.

(These adjustments would need to be made to the appropriate raw cost and raw cost adjustment event classes per individual implementation requirements based on the types of costs where the burden is applied.)

When the Subledger Accounting event class for Labor Cost is not modified, it will accept your accounting event based on auto-accounting built account combinations for the labor cost and labor cost clearing definitions. The same applies to the Total Burdened Cost event class.

Costing and Cost Plus Processing

• Project managers and finance decide which costs are burdened and applied to raw costs or if they are set up as a cost plus agreement
• Default rate schedules can be used, but individual schedules can also be created

Automatic Account Generation

• Each transaction entered into the Project Accounting module updates any related accounting modules
• Credit payroll costs to the correct liability accounts
• Feeds from the Auto Accounting functionality

In Oracle R12, the General Ledger (GL) configuration is used for basic financial recording across the entire organization, while the Project Accounting module provides a more granular level of cost tracking specifically for individual projects, allowing you to monitor expenses and revenue tied to each project separately within the broader financial picture managed by the GL.

Key Differences:

• Scope:

GL handles all company-wide financial transactions, while Project Accounting focuses on detailed cost and revenue tracking for individual projects.

• Level of Detail:

GL uses standard account codes for broad categories of expenses and revenue, whereas Project Accounting allows for tracking costs at a much finer level, including specific project tasks, resources, and vendors assigned to a project.

• Integration:

Project Accounting integrates with the GL by feeding project-related cost and revenue data into the general ledger through the Subledger Accounting feature, providing a consolidated view of overall financial performance while maintaining project-specific details.

When to Use Each:

• GL:

• • Recording standard business transactions like sales, purchases, payroll, and depreciation.
  • Generating financial statements for the entire company.
  • Managing overall financial health and compliance.
• Project Accounting:
  • Tracking costs and revenue for specific projects, including labor, materials, and overhead.
  • Analyzing project profitability and identifying areas for cost optimization.
  • Managing project budgets and forecasting future project costs.

Example:

• GL Entry:

Recording a company’s monthly utility bill as an expense in the “Utilities” account.

• Project Accounting Entry:

Tracking the cost of electricity used for a specific construction project, including which project phase it belongs to and the specific hours of usage.