Architects work to different timescales than most professional service providers and their accounts need special treatment.
It’s not unusual for an architectural project to take a year or two to complete from the initial conversation with the commissioning client to completion of construction.
With multiple projects overlapping, cutting across tax years, with sporadic payments, staying on top of the firm’s overall financial position can be a challenge.
Project accounting, or project cost accounting, addresses that by basically treating each project as a business venture in its own right, with its own set of books and financial reports.
This enables architects to control their costs, manage time and resources, find ways to be more efficient and, crucially, ensure profitability across the firm as a whole.
Or to put that another way, if you look after the projects, the practice will look after itself.
Project accounting v. standard accounting
One of the key differences between project accounts and standard management accounting is a more frequent reporting schedule.
Whereas you might look at your practice’s top level accounts monthly or quarterly, projects need to be managed much more closely – especially at points when there’s a lot going on, such as the final phase of construction.
They also go into much more granular detail than you’d expect in standard accounts. Is the project on track to stay within budget? Or is it necessary to take action to get control of spiralling costs?
Project accounts usually have a strong focus on resource management and so need to tie into timesheets or other time-tracking tools.
It also overlaps with project management – if you miss project milestones, it’ll have a knock-on effect on your budget. For example, you might have to cover the cost of storage if you’re not ready to take a delivery of materials on the date agreed.
If you think of the project manager or project architect as effectively the CEO of their own business within a business, project accounts are the information they need to make decisions on a weekly or even daily basis.
And for the management of the practice, they provide the readouts from each project necessary to monitor the overall health of the business.
Benefits of project accounting for architects
Digging into the specifics a bit more, there are lots of good reasons to adopt a methodical project accounting approach. I’m just going to highlight three big ones here.
First, it’s a really great way to help your team develop and gain the budgeting and decision-making skills they need for top-level practice management. If you want to attract and retain the best talent, making sure they have opportunities to learn on the job is really important.
They’ll feel trusted and enjoy the freedom of managing their own project. And it’s a really concrete way to measure their performance, which in turn gives them a strong incentive to do the best possible job and stay on top of things.
When the budget is your responsibility, and you’re being judged on managing it, you do tend to become a bit sharper and less prone to putting up with waste or inefficiency.
Secondly, it gives precise, almost real-time control of margins. With project accounting, you can get a readout on each project when you need it and take action straightaway if there are problems. The alternative is waiting for it to be flagged in your monthly or quarterly management accounts, by which time you might have missed the window to make the changes needed.
Finally, it helps stay on top of cashflow by providing up-to-date information on when work has been completed and can be invoiced for and, equally, whether third-party materials or services have been supplied to spec, on time.
What’s the catch?
There’s no getting away from it: project accounting requires more work and generates more documentation.
Personally, as someone who believes in the power of processes, I don’t see that as a downside, but I can empathise. If you got into architecture because you’re a creative person excited about working on epic projects, spending time poring over financial data probably wasn’t part of the dream.
That’s why I wouldn’t recommend a project accounting approach for every practice, or for every job. Don’t do it for the sake of it – do it because it makes sense for your business.
I will say, though, that if you’ve ever felt that sense of your budget running away with you, or worried whether you’re actually going to make money on a project when it’s all done, then you’ll probably find it beneficial.
Cloud accounting is perfect for projects
Another bit of good news is how easy technology has made project accounting these days.
Using cloud software such as Xero or FreeAgent, you’ve got access to time tracking and project budgeting functions that would have been reserved for the Arups and Fosters of this world a decade or two ago.
In both packages, you can set up projects and bill jobs to them, record time and track project budgets. Reports are presented clearly and in a form that makes it easy to share information and collaborate with your colleagues on the project team.
Even better, you can do that on your phone, tablet or laptop from anywhere, including on site during construction. The ability to keep things up to date in real time while the information is fresh in your mind makes record-keeping less of a chore and also makes it much more likely that you’ll be able to stay on top of things.
Talk to us about managing your practice’s accounts.