Transcript of "Using Project Accounting Data to Improve Profitability"
Using Project Accounting Data to Improve ProfitabilityMore companies than ever are seeking to understand project accounting costs as theyrealize that knowledge of this data impacts their bottom line and exposes areas where costscan be cut and/or profits can be made. By understanding project accounting costs,companies can discover financial problems with projects early on and fix them. This canpotentially save millions of dollars. But just because companies seek to understand thesecosts doesn’t mean they know the best way to go about finding the information.Say, for example, that Company XYZ decides to pay more attention to project Financialsand discovers an out-of-control project. Maybe Company XYZ can do something about it –like cancel the project, put different resources on it, or change the scope. Or maybe theydidn’t discover the problem until it was too late to save the project because they missedsome key steps. Projects that get rescued often do so because they have an accurateproject accounting cost data which allows for discovery of the problem early enough to fix it.Read on to find out how to manage your project accounting costs accurately.
1. Understand that Time is MoneyTo understand project costs, you have to know who worked on the project and for how long.This is achieved through a good time tracking system. Time-tracking data (payroll, billing,project management, and strategy) feeds: Project cost accounting - How much have we spent? Tracking - Are we done yet? Management - What should we do next? Estimation improvement - How much is this going to cost us?Tracking time is often viewed with a somewhat negative connotation. At best, it is anecessary though disliked factor in determining wages and billing. At worst, it is seen as amethod of keeping employees under totalitarian scrutiny, a waste of time, and inefficient.However, the truth is that time tracking, when instituted properly, can have massive financialbenefits for a company and for its individual employees.2. Use Key Performance Indicators to Measure Intermittent SuccessA key performance indicator or KPI measures an organizations progress towards astrategic goal. When leveraged correctly, KPIs can make a huge impact. “Percentage ofprojects profitable” is a KPI that can really affect your business in a positive way. As ananalogy, consider British Petroleum (BP) and its experiences in drilling for oil. BP created astrategic vision for the company called “no dry holes.” Drilling for oil and not finding it isexpensive. Rather than try to make up for all the dry holes by finding an occasional gusher,BP decided to try to never have a dry hole in the first place. Changing the attitude that dryholes were an inevitable cost of doing business fundamentally changed its culture in verypositive ways.If you set a strategic goal for your company of “no unprofitable projects,” it will change thenature of discussions in your business. For example, it empowers frontline employees tolegitimately push back when a project is being taken on for political reasons. Conversely,having the attitude that the winners will make up for the losers doesn’t do this.Measuring this KPI is easy because you can obtain direct per-project cost data from yourtimesheet system. Correctly applying indirect data (such as sales or accounting time) to thedirect costs is a bit more complicated. Connecting all of this to revenue data gives you per-project profitability. Once you have that data, you can work on your KPI of percentage ofprofitable projects to try to maximize it. The formula for this KPI for a given time period(usually a quarter or a year) is:# of profitable projects/# of projects
3. Estimate Accurately and Adhere to Your EstimatesMany companies do a poor job with bidding projects appropriately. In order to avoidunderbidding or overbidding, you can use the formula [(E-A)/E] where:E = Estimated hours to complete projectA = Actual hours used to complete projectImproving this number can be difficult for some companies until they understand a simpletruth: similar projects often have a strikingly similar ratio of early phase cost to overallproject cost. The early phases of a project are usually referred to as the “requirements,”“design,” or “specification” phases. If after carefully tracking time on a batch of similarprojects, you find that the first two phases usually take about 10% of the total project time,you can then use that data to predict the length of future projects.Lets consider how tracking the time it takes to complete a project helps in planning futureprojects. By tracking time and subsequently learning that the first two phases of Projects 1and 2 took approximately 10% of all project time to complete, the projected length of Project3 becomes easy to determine. If the first two phases of Project 3 take 1.8 months tocomplete, you can estimate that the entire project will be completed in 18 months. Thisproject estimation technique has proven itself to be extremely accurate for similar projects ina variety of companies.4. Quality Data In = Quality Data OutIn order for project accounting data tote, the data that is put into the system must beaccurate. Employees are often resistant to the idea of tracking their time on all of theiractivities. This is understandable; no one has ever gotten a promotion for their exemplaryability to fill out a timesheet. However, the value of this data is tremendous if you need tolook back into a project’s activity or budget or timeline. Employees need to understand thatthere are tangible benefits of tracking their time. Without tracking time to specific projects, itis impossible to calculate the real worth of their time, and the real value of their contributionsto the project. Additionally, not providing accurate time tracking information will skew theproject accounting data for the entire project.Bad project accounting leads to unnecessary overtime, stressful, blown schedules, badestimates and cancelled projects. Citing specific examples from your company’s historywhere the accurate time collection could have made things easier for your employees helpsto get them on board.For More information visit: http://www.theicpm.com/blog/item/4683-using-project-accounting-data-to-improve-profitability