Why Project Accounting? It's Accounting for Knowledge Workers in the New Millennium
Finch, Curt, Strategic Finance
Think about what your parents and grandparents did for a living. Chances are they were farmers or factory workers for at least a portion of their careers.
The era of manufacturing and farming, however, has given way to one of knowledge work. This is old news in the U.S., but, if current trends continue, nearly everyone will become some sort of knowledge worker in our lifetime. The tools for such a shift are becoming more widely available. According to Gapminder.org, a nonprofit group that develops and provides free software to visualize human development, telephone and Internet usage in countries from Cameroon to Peru has increased up to 1,000%. Internet access is penetrating very poor economies much faster than prior technologies did.
A knowledge worker is someone who works primarily with information or who develops and uses knowledge in the workplace. The term wascoined by Peter Drucker in 1959. If you sit in front of a computer throughout most of your day,then you're a knowledge worker. Lawyers are knowledge workers, asare webmasters, accountants, and software engineers.
Historically, farmers invented simpleaccounting and writing systems to tracktrades and debt. Manufacturers required materialscost accounting. But most knowledge worker organizations today don't know their costs on a per-project basis at all. In the knowledge economy, understanding production costs requires a new approach--project accounting.
Companies like Wal-Mart, Dell, and Archer Daniels Midland exemplify how well the problem of materials management is already solved. Knowledge, process, and project management, however, are still relatively nascent fields.
Out of our 30-millennia history, we have seen the cost of knowledge workers rise to be a significant portion of the economy only in the last 50 years or so. According to data collected by the United Nations, in Texas in 2003, 48% of the workforce fell into the knowledge worker category, up from nearly zero in 1900. If these trends continue, knowledge work will eventually encompass the majority of workers globally.
What does all this mean? For the first time since Sumerian farmers invented accounting thousands of years ago, business owners don't know their costs. If you don't know your costs, you don't know where you're profitable. And if you don't know where you're profitable, you can't steer your company to success.
WHAT IS PROJECT ACCOUNTING?
Project accounting is the practice of creating financial reports designed specifically to track the financial progress of projects, thus leading to more effective project management.
Stephen Covey argues persuasively in his book The 7 Habits of Highly Effective People that you should track your time even if it's just for yourself. If you do, you will certainly be surprised. In addition, if you have more than five people or so in your organization and they are working on many projects or within many processes, it's time to start thinking about implementing time tracking.
As management accountants know well, if you understand your costs, you can run your business. Otherwise, you're flying blind. If you have 100 people in an R&D group and you aren't tracking time, then you may be wasting the lives and work of a significant percentage of your employees. Based on my experience, odds are you have them working on projects that either the market isn't interested in, are over budget, or are otherwise in the ditch--and you don't even know it.
Guiding your company forward to a time-tracking environment requires changes to your corporate culture. The biggest impediment to success in project accounting is employee resistance to data collection. Why do people hate to track their time so much?
Reason #1--Reporting time seems to threaten status.
For salaried people, especially if they once worked in an hourly "time clock" environment, reporting time can make them feel demoted. …