What is project costing?

When a company sells products, it is relatively straight forward to see what the profit is on each unit sold because the chart of accounts within most accounting systems is set up to show cost of goods sold against sales value, giving clear profit margins. Yes, you can adjust the basis on which the cost price is calculated and you may want to reflect additional costs in the calculation to take account of shipping and packaging, but broadly you will have a unit cost price and a unit sale price and can clearly see the profit.  

But if you run a business providing a service on a project-by-project basis, you may find that it is far from straight forward to work out the individual profit on each job or project because those costs may be distributed across a range of ledger codes.

Project codes

To address this, more accounting systems now offer a degree of project costing which allows you to tag entire transactions or individual lines of a transaction to a particular project code. Project codes are different to ledger codes because they sit alongside, as an analysis dimension and do not change where the financial transaction is posted.

Take salaries for example. If you provide a service based project, you may want to code part or all of an individuals salary to the project based on the hours they have spent on it. Now, you’re not going to set up a new ledger code within salaries for each project as this would make your chart of accounts unwieldy. Equally, your salary cost needs to go to the salaries code on the ledger as, overall, it is a business cost. So, by tagging part or all of the salary transaction to a project, you can split that individuals salary across multiple projects, whilst also being able to see their total cost to the business. On the other side, when you invoice the project, you will enter a charge out rate for the labour. The overall revenue from your labour may go to ‘Sales – Labour’ on the chart of accounts, but an individual portion can be shown as specific revenue for that job.

This example is easily rolled out for each aspect of the project. From materials and labour to mileage and even products. When you run a query on the project code, it will extract all costs and all revenue that have been tagged as applicable to that project, giving you a mini profit and loss for the project. Because the project is an analysis code, not a ledger code, it is not restricted to viewing transactions solely from a single financial year, allowing you to look at the lifetime of a project even if it spans multiple financial years.

Making project costing work for your business

It might seem obvious for a project based business to use project codes for each project, but before setting it up in a traditional format, you may want to consider what would be of most benefit to you in terms of reporting. Do you need to know the profit on each project, do you need to monitor time and materials used on an initial project to help you with future estimating or do you need something more than that? Also, how many projects are you going to run and how long will each last? Are you segmenting something that doesn’t need segmenting or analysing?

A plant hire company could choose to analyse the profit on each hire period which makes the most sense at face value. But what about if the item of plant became the project and you then allocated every hire to it in terms of revenue and every nut, bolt, drop of oil and service in terms of costs over its lifetime? This would give you the ability to see utilisation rates and overall return on the investment, helping inform future decisions on where to spend your money – which pieces of plant have the lowest running costs and highest demand in terms of rental/value. A novel way to turn project costing on its head to work for the business.