Project Accounting Guide For Consultants & Consulting Firms

Assessing project and/or client profitability is a common challenge for many consulting firms.

And if you’re not doing it right (or at all) your engagements could start showing symptoms of overruns, timeline/cost issues, and unhappy stakeholders across the board.

Project Accounting and other similar methodologies can provide the necessary insights to get your engagements under control.

It shows you exactly which projects, service lines, products, or other subsets of your delivery team are profitable – and which aren’t.

Admittedly, it’s a bit complex to implement correctly.

In this post, we’ll show you how to implement traditional project accounting practices, as well as some more modern alternatives that can provide a similar level of insight for a fraction of the cost and effort.

We’ll even cover strategies consultants who are still working solo, or with a small team of contractors or freelancers can use to get project accounting insights without all the project accounting complexity — so stay tuned until the end!

Let’s jump in.

Project Accounting and other similar methodologies can provide the necessary insights to get your engagements under control.

What Is Project Accounting?

Project Accounting is about reviewing past projects to compare income against costs like staffing and materials.

It’s usually done after a project is complete, but sometimes during a project for prioritizing or assessing performance.

The practice of project accounting is important because it helps agency leaders monitor and evaluate performance at the project level. Understanding how past projects did guides future decisions about project prioritization, staffing, scoping, pricing, and overall agency performance.

Some firms may also attempt to practice project accounting mid-project as a way to inform prioritization of project management efforts and in-progress engagements that may be at risk of going off the rails.

However, project accounting is generally a very difficult methodology to use for measuring in-progress work, so we’ll discuss some better-suited alternatives later in this post.

Implementing project accounting at the traditional level can be relatively costly and time-consuming, but it can still be an effective solution, especially for larger firms that are primarily billing on time and materials.

If you’re a smaller consulting firm, a firm that employs flat rate, retainer or value-based pricing models, or values speed of insight over precision, you’ll likely want to consider some simpler approaches that we’ll go over later in this post.

First, let’s go over how agencies have generally reached these numbers through a traditional project accounting practice.

How Project Accounting (Traditionally) Works In Consulting

It usually looks something like this:

1. Start by creating a budget that outlines projected costs and resource allocations.
2. Next, you should establish a tracking system for monitoring both incoming revenue and outgoing expenses related to the engagement. These transactions should be recorded in a manner that simplifies their reconciliation within the accounting process. Don’t worry, we’ll cover your overhead expenses later.
3. Then, install a time tracking system so that your team can accurately record the time they spend working on the engagement. This data is crucial for accurately assigning labor costs to the project.
4. Once the project concludes, the next step is reconciliation. This involves collecting all vendor invoices and aggregating total income and direct expenses. Properly allocating the cost of your team’s efforts is vital for generating a comprehensive project profitability report.
5. Finally, a thorough review of the profitability report is necessary. This review includes assessing project performance against initial estimates, evaluating actual outcomes, and extracting valuable insights. Use these insights to inform necessary adjustments in areas such as pricing, estimation methods, operational processes, or team structure.

Our recommendation is to focus project accounting on measuring Delivery Margin (also referred to as Gross Margin or Contribution Margin in some cases) as opposed to attempting to infer “net profit or net margin” at the client or project level.

Not only does this keep things simpler, but also provides a more accurate measurement of profitability at more discrete levels of the firm since externalities are not influencing the cost-basis that margin is being calculated on.

This doesn’t mean ignoring things like overhead and utilization rates. It simply means accounting for those things in the targets we set for Delivery Margin at the onset. More on this later.

Typically, this process will be run by your finance team inside of the accounting software that you use. With that said, there are a few limitations and considerations to be aware of before implementing project accounting.

This doesn’t mean ignoring things like overhead and utilization rates. It simply means accounting for those things in the targets we set for Delivery Margin at the onset.

Limitations Of The Traditional Project Accounting Approach

There are a few challenges that make project accounting less accessible for smaller agencies or those who bill on anything other than time & materials.

Cost

There are two prongs to the cost issue. That is, the cost of setup, and the cost to maintain.

Those who implement project accounting at their own firm will need to work closely with their finance team to set up their accounting tool to handle the additional metadata and reporting required to allocate every expense and income transaction to a project, as well as accurately assign labor costs to projects.

This will also create additional steps and considerations for the bookkeeping and reconciliation process, often leading to a permanent increase in the complexity and scope of the ongoing finance department’s responsibilities.

This additional complexity and nuance will also often require more input from your firm into how to allocate transactions that the finance team doesn’t have adequate context to make judgment calls on. It will also increase the scope of running quality assurance checks on the books to ensure everything is being reconciled and allocated properly.

Time

Implementing project accounting is likely to take some time as it can lead to changes in the structure and use of objects in the accounting tool and the processes the finance team follows in order to maintain your books over time.

The more important consideration is how the additional complexity of adding project-based accounting to your accounting workflows might further delay reconciliation periods.

Most firms are waiting 2-3 weeks for their reconciled books without the additional complexity of project accounting. With more steps and nuances added to the process, it’s likely that an additional 1-2 weeks be added to that timeline each month in order to complete the base process and work through an increased number of edge cases that require input from your firm, and a higher number of transactions that need to be reclassified after being allocated to the wrong project or expense category.

This compounds the innate weakness of finance data, which is that the data is often quite old by the time it’s ready for review.

One way to shorten that cycle is to increase the scope of the bookkeeping process, which will further increase the cost of your finance process going forward.

Incorrect Implementation

Even if you’re OK with the cost and time investment it would take to implement project accounting, there are a few common missteps that are made, posing a risk to the usefulness of your data.

Improper Revenue/Cost Recognition

For those who are looking to manage in-progress projects, it’s common to rely on the invoicing schedule to recognize costs and revenue. Rarely is this an accurate portrayal of when the cost is incurred and the revenue is earned.

In order to allow for more timely insights into project performance, especially for engagements spanning several months, it is likely that a much more sophisticated accrual revenue and expense recognition process will need to be implemented which bases accruals on Earned Value (percent complete) rather than invoice schedules.

Team Costs

Moving on, team costs are also a common misstep. How might you apply the cost of your team to a given project? There is a lot of complexity we see firms get wrapped up in.

For example, trying to allocate salary costs based on payroll from one time period to the next, and/or adjusting the cost of their labor based on utilization rates. These complexity traps not only add a significant amount of work to the financial process, but they actually decrease the accuracy of project profitability insights since they factor externalities into the cost-basis of a project — and make it impossible to compare projects against each other over time.

The best policy for allocating direct labor costs is to choose the more accurate but less precise method based on more static ACPH values for each team member.

Overhead Costs

Another common complexity trap that firms fall into is attempting to include overhead costs in their project accounting workflow. This creates exactly the same challenges as trying to allocate payroll costs in an overly precise way.

Aside from being costly to implement and maintain the allocation of all of these overhead costs to individual projects, it also lowers the accuracy of project profitability for all the same reasons factoring utilization rates into cost rates does.

This is a fundamentally flawed approach because some of these inputs in overhead aren’t directly related to the performance of a particular project. By including overhead in the cost-basis, we factor an externality into the project which can create the perception of improved or decreased profitability on individual projects that isn’t actually real.

This makes it impossible to compare projects over time and understand if the profitability of the work itself is going up or down. These overhead costs fluctuate completely independently from a project’s life cycle and shouldn’t be included in this calculation.

Just like utilization rates, the better solution is to set Delivery margin (or Gross Margin) targets at the project level that accounts for the cost of Overhead and Utilization.

This allows you to factor those costs into your pricing and project performance measurement, without adding additional complexity or damaging the accuracy or usefulness of that metric.

Just like utilization rates, the better solution is to set Delivery margin (or Gross Margin) targets at the project level that accounts for the cost of Overhead and Utilization.

Shortcuts for Project Accounting

By now you may have gathered that project accounting, while useful, can be quite complicated and cost-effective to set up, and in many cases may not be well suited to giving you the insights you need, when you need them.

That’s exactly why many firms are moving towards more modern approaches to measuring project performance that rely more on operations data in order to get similar insights with far less cost and complexity, and get these insights far more frequently than they otherwise could through their financial departments.

These operational metrics happen to be what we specialize in at Parakeeto.

There are two metrics that you can use that are easier to find and maintain, that can answer the same fundamental questions about project performance that you might be seeking from project accounting, with much less effort, time, and reliance on your finance team.

The first and most powerful metric is Average Billable Rate (ABR)

Average Billable Rate (ABR)

Average Billable Rate (ABR) is a way to measure how much revenue your team is earning for every hour they spend doing client work.

The formula is dead simple to calculate, and requires very little information. For example, if you were paid $200 for a project, and complete it in 2 hours, your ABR would be $100 per hour.

This metric is a way for you to measure how efficiently you’re earning your revenue. It will allow you to compare how profitable a project/product/service line (or other subset of your business) is so that you’re able to make decisions. It can be used to measure any set of work (a single project, client, or service, or a group of them) across any time period (a week, a month, a quarter, a year, etc) and always requires two simple inputs.

The official formula is as follows:

ABR = AGI / Delivery Hours

AGI is simply your revenues minus anything revenue that would be considered pass-through (like expenses for print budgets, ad spends, white label partners, external vendors, materials, etc.)

Delivery Hours are just the total hours you (or your team) spent on a given project (regardless of whether or not they are billed to the client)

You may be a solo consultant, in which case the hours you put towards a given project will be easy to track. Given that some of you are likely considering trying to scale your operation, let’s run through a quick calculation of your Delivery Hours should you go down the path of hiring these roles out.

Basic Audit – Consulting Service Roles

Role	Hours Needed
Project Manager	10
Data Analyst	10
Strategist	22

So we can see that we’ve got a total Delivery Hours of 42 needed on this project.

Imagine you’re that consulting firm that offers two levels of an operational audit service – basic and premium.

Project	AGI	Total Hrs Logged	ABR (AGI/Delivery Hours)
$10k Basic Audit	$10,000	42	$238
$30k Premium Audit	$30,000	150	$200

While one project brought in more gross profit, you actually delivered the basic service at a more efficient rate. In this scenario, it would be worth figuring out how you can deliver more of the service that you’re more efficient at delivering to achieve higher margins.

ABR can also show you which clients may or may not be easier to service. If you’re in a spot where you think you can start practicing revenue replacement, here is how you’d recognize which clients are more of a P.I.T.A than others:

Project	AGI (annual)	Total Hrs Logged	ABR
Client 1 – $3k MRR – Basic Consulting	$36,000	290	$124/hr
Client 2 – $3k MRR – Basic Consulting	$36,000	135	$266/hr
Client 3 – $3k MRR – Basic Consulting	$36,000	177	$203/hr

Let’s make things a little more interesting.

Estimated Delivery Margin

One step further that you can take to get the same insights as you’d get from a project accounting practice would be to track your Delivery Margin. This metric is the ratio of upside that your firm keeps after paying for its Delivery Costs on a project.

We can get a general sense of this number by taking your ABR from our first calculation and adding in an Average Cost Per Hour figure.

Average Cost Per Hour

What does your team cost you on average per hour?

If you’re going to be doing a solo consulting practice, you can figure out your ACPH by taking your total compensation in a year (salary + benefits + bonuses, payroll taxes), and dividing it by the total number of hours you’re working each year.

If your aspiration is to build a team, our recommendation is to figure out what it would cost to hire people for each role you might be doing on a project, and assigning that cost-rate to each hour to understand what project margins would look like at scale.

This will also allow you to set your pricing up for success in the future, and start systematically buying your time back as you take on more work and decide to offload lower-value tasks to freelancers.

If you’ve got a team, it’s just the same calculation above at scale. Here is what that could look like:

Role	Total Annual Comp	Working Hours/Yr	ACPH
Project Manager	$75,000	2080	$36
Data Analyst	$65,000	2080	$31
Strategist	$120,000	2080	$58
			Avg = $41

Now that we know how to get our ACPH, let’s go back to our Delivery Margin formula.

Our formula for this metric will be as follows:

Estimated Delivery Margin = (ABR – ACPH) / ABR

With our above ABR metric, you can get a general idea of the profit margin you can expect on a given project by adding in ACPH.

For example, let’s assume that we’ve sold another Basic Consulting Audit to a client for the standard $10,000. Our ABR will be our AGI divided by our estimated hours to complete.

Basic Audit – Consulting Service Roles

Role	Hours Needed
Project Manager	10
Data Analyst	10
Strategist	22

• $10,000 / 42 = $238
• ABR = $238

Then, we add in our ACPH figure of $41/hr.

• Estimated Delivery Margin = (ABR – ACPH) / ABR
• $238 – $41 / $238 = 0.82
• Estimated Delivery Margin = 82%

This means that as you’ve structured it currently, your Basic plan should be running at a very healthy 82% Delivery Margin.

We generally consider a delivery margin of 60-70%+ on a per-project or client basis healthy. This allows for a 10-20% drop-off in margin to account for utilization gaps, another 20-30% to be allocated to overhead, leaving you with at least a 20% EBITDA on the bottom line.

If you’re not there yet, you might want to consider reading how to improve your delivery margin.

CPI (Cost Performance Indexing)

To proactively manage ongoing projects more effectively, consider using Cost Performance Indexing (CPI).

CPI is a cost-efficient tool that provides insights and guides your team’s focus. It measures project progress using this simple formula:

CPI = Earned Value (EV) / Actual Cost (AC)

A CPI above 1 indicates the project is under budget, while a CPI of 1 means it’s on budget. A CPI below 1 suggests the project is overspending. You can use CPI to predict project completion time by dividing the initial budget by CPI. Here’s an example:

Imagine you’re assessing a website design project with a $30,000 budget and 200 hours estimated for completion.

• Earned Value (EV) = 100 hours (50% complete)
• Actual Cost (AC) = 120 hours
• CPI = EV / AC = 100 / 120 = 0.83 (less than 1, indicating overspending)

A CPI below 1 prompts a discussion with your team about why this occurred and helps you allocate resources effectively. You can use CPI to prioritize projects in progress and identify those at risk, as shown in the table below:

Project	AGI	Est Hours	% Complete	Actual Hrs	CPI
Project 1	$20,000	130	50%	70	0.92
Project 2	$14,000	110	40%	50	0.88
Project 3	$40,000	300	60%	110	1.63

 

Additionally, you can use CPI to forecast project completion hours and estimate metrics like Estimated ABR and Delivery Margin. This can be calculated by dividing the original estimated hours or budget hours by CPI.

For example, with a CPI of 0.88, a project originally budgeted for 100 hours will require 113 hours to complete. Assuming an AGI of $20,000 and an ACPH of $50:

• Estimated ABR = AGI / Delivery Hours = $20,000 / 113 = $176
• Delivery Margin = (ABR – ACPH) / ABR = ($176 – $50) / $176 = 72%

By leveraging CPI and these calculations, you can gain valuable project insights with minimal complexity and cost early on in a project, and get focused on the right projects at the right time.

In Closing

Project Accounting remains a crucial aspect for consulting firms to keep tabs on project profitability. However, the conventional methods for obtaining these figures have proven to be overly detailed, time-consuming and costly.

Fortunately, a simpler measurement approach can offer equally precise results, providing valuable insights and cost savings.

While Project Accounting is the prevailing solution, it entails significant expenses and time commitments. Its complex calculations and the need to allocate costs and revenues to specific projects can be cumbersome to implement. Moreover, it can divert the finance team from their primary responsibility of ensuring compliance with regulatory and reporting requirements.

Discover the same insights using just your operational data to uncover metrics like Average Billable Rate (ABR) and Estimated Delivery Margin. These metrics enable you to identify profitable projects, assess the performance of clients or services, and keep a close eye on budgets.

If you’re interested in digging deeper into the modern approach to measuring and optimizing the profitability of your consulting firm, check out our free content and resources at Parakeeto. We specialize in helping firms measure & improve their profitability using operations metrics and data.

By embracing this approach, agencies can streamline their project accounting procedures, make data-driven decisions, and achieve greater financial clarity and success—all while requiring less time and operational resources compared to traditional Project Accounting methods.

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Marcel Petitpas is the CEO & Co-Founder of Parakeeto, a company dedicated to helping agencies measure and improve their profitability by streamlining their operations and reporting systems.

He’s also the head strategic coach at SaaS Academy by Dan Martell, the #1 coaching program for B2B SaaS businesses in the world.

In his work as a speaker, podcast host and consultant, specializing in Agency Profitability Optimization, he’s helped hundreds of agencies around the world measure the right metrics and improve their operations and profitability without relying on financial data and accounting professionals, and take control of their business with simple numbers anyone can understand and measure.

When he’s not helping agencies make more money, he’s probably watching “The Office” or “Parks and Rec” on a never-ending loop and eating breakfast foods for every meal of the day.