In a project-based business, the total profit is visible at the end of the year; however, it remains unknown which project brought in gains and which caused losses. An average result masks both good and bad projects.
This uncertainty leads to the next proposal also being submitted based on intuition. A type of loss-making work is inadvertently undertaken again.
In this article, we explained the project card, cost center structure, cost allocation, and project profitability reporting.
Table of Contents
Difference between project and cost center
A project and a cost center look similar; however, they answer different questions and should not be used interchangeably.
A cost center is a permanent unit; it represents an ongoing structure such as a department or branch.
A project, on the other hand, is temporary; it has a beginning and an end, and closes when completed.
An expense can belong to both a cost center and a project. The two are not mutually exclusive and can be used together.
We covered cost center setup in the cost center tracking article.
What should be on a project card?
A project card must contain basic information about the project and the basis for cost tracking.
Customer information is the first field; it must be linked to the current account for which the project is being executed.
Start and planned end dates must also be recorded. Time overrun is the most common cause of cost increases.
The budget amount must also be entered; actual costs are tracked against this amount.
Assigning a responsible person personalizes tracking; unowned projects cannot be monitored.
Coding and naming
Having project codes in a consistent structure significantly facilitates searching and reporting.
Codes containing year information naturally enable periodic grouping, while sequence numbers guarantee uniqueness.
It is also important for the project name to be clear; including the customer name along with the code makes searching easier.
Loading too much meaning into a code creates problems later; when the project type changes, the code becomes incorrect.
Attributes should be kept in separate fields rather than within the code; this allows for future modifications.
Expense allocation
Accurate calculation of project costs relies on linking all expenses to the project.
Material purchases are the easiest items to link; the project is selected during procurement.
Service and subcontractor expenses must be linked in the same way. These items constitute a significant portion of project costs.
Labor costs are the most frequently overlooked items; worked hours need to be logged to the project.
Transportation, accommodation, and equipment usage must not be forgotten; these small items add up to serious amounts in total.
Revenue allocation
Revenue must be linked to the project just like costs; otherwise, profitability cannot be calculated.
Associating issued invoices with the project establishes this link. Line-item based association works more flexibly.
In projects worked on a progress payment basis, each progress payment must be recorded separately and total progress must be monitored.
Collection status should also be viewable from the project card; invoiced but uncollected amounts represent a separate risk.
This link also directly feeds cash flow planning.
Overhead cost distribution
Some expenses do not belong to a single project and need to be distributed.
Office rent, administrative expenses, and general equipment costs fall into this group.
Project duration, turnover share, or spent labor hours can be used as the distribution key.
It is important that the key is fair and understandable; a controversial distribution leads project managers to distrust the result.
It is also useful to show distributed expenses separately in the report; they should not be confused with direct costs.
Project phases
In long-term projects, defining phases allows for closer monitoring of progress and costs.
Each phase can have its own budget, and actual costs can be compared on a phase-by-phase basis.
This distinction shows at which phase the deviation occurred and enables intervention.
The number of phases should be kept moderate; excessive segmentation increases the burden of recording and leads to abandonment.
In short-term projects, phase definitions are generally not needed.
Profitability reporting
The project profitability report is the main output of this definition structure and directly increases decision quality.
Revenue, direct cost, and distributed expenses should be shown in separate rows, allowing margin layers to be visible.
The comparison between budget and actuals reveals the deviation, and the reason can be investigated.
In ongoing projects, it should be read alongside the completion rate; the cost of a project that is half finished does not provide information on its own.
Collective analysis should also be done based on project type; this is how it is seen which type of work is profitable.
Impact on future proposals
The most valuable use of project cost data is the more accurate preparation of future proposals.
The actual costs of similar projects create a realistic baseline for the new proposal.
Items showing continuous deviation are also identified; these items should be calculated more cautiously in proposals.
As for project types that cause losses, either their pricing should be corrected, or they should be abandoned altogether.
We covered the proposal preparation process in the quotation preparation article.
Points to consider
Leaving the project field blank renders the entire analysis dysfunctional; this field must be made mandatory.
Excluding labor costs makes projects look more profitable than they are.
Unclosed projects also skew reports; completed projects must be closed.
A lack of transparency in the distribution key leads to a lack of trust in the results.
Definitions are managed in the definitions module and associated with expense records.
Frequently asked questions
Should every job be opened as a project?
They should be opened for tasks requiring separate cost tracking; a cost center is sufficient for routine tasks.
How is labor allocated to a project?
The time spent is recorded and multiplied by the unit cost; we configure this setup according to your needs.
Can an expense be split among multiple projects?
Yes, it can be split; the distribution ratio is determined manually or via a predefined key.
Are closed projects archived?
Yes, they are archived; historical data should not be deleted as it serves as the basis for future proposals.
Project-based cost tracking reveals the truth hidden behind average results. Knowing which work is profitable directly improves subsequent proposals.
Make the project field mandatory; records left blank render the entire analysis useless.
Make sure to include labor costs as well; this is the most frequently overlooked item and makes projects look more profitable than they are.
Keep distribution keys transparent; a controversial distribution destroys confidence in the results.
Close completed projects as well; old records left open disrupt periodic reports.
By consulting with the EQLEM team, you can configure your project cost tracking.