An ERP for service companies looks very different from one built for a factory or a distributor. IT services firms, engineering consultants, architects, marketing agencies, facility management contractors and installation companies do not sell stock off a shelf. They sell people's time and expertise, organised into projects, and they bill by milestones, time and materials, retainers or fixed fees. The questions owners ask are about projects: are we making money on this client, are our people utilised, what has been delivered but not yet billed? General accounting software answers none of these without heavy spreadsheet work. This guide explains what project accounting means, the processes a services ERP must support, worked examples of project profitability and utilisation, revenue recognition basics and a selection checklist.
Why services businesses need project accounting
In a services firm, the project is the unit of profit. A firm can be profitable overall while a third of its projects lose money, subsidised by a few good ones. Without project accounting:
- Costs are recorded by expense type (salary, travel, subcontractors) but not by project.
- Billing is triggered by someone remembering, not by milestones or logged hours.
- Work done but not billed (unbilled revenue) is invisible until month end, if at all.
- Pricing for the next proposal is based on guesswork rather than actual effort on similar past projects.
Core process 1: Project setup and budgets
Each project should be created with:
- Client, contract value, billing method and payment terms.
- Phases, tasks and milestones.
- Budget by resource role (hours x cost rate) and by expense type (travel, subcontractors, materials).
- Project manager and team.
Example project budget
Suppose a hypothetical Bengaluru engineering consultancy wins a ₹48 lakh fixed-fee design project:
| Role | Budget hours | Cost rate (₹/hr) | Budget cost (₹) |
|---|---|---|---|
| Principal engineer | 220 | 2,500 | 5,50,000 |
| Senior engineers | 900 | 1,400 | 12,60,000 |
| Design engineers | 1,800 | 800 | 14,40,000 |
| Travel and site visits | n/a | n/a | 1,50,000 |
| Total budget cost | 34,00,000 |
Budgeted margin: ₹48 lakh minus ₹34 lakh = ₹14 lakh, or 29 percent. Cost rates should include salary, benefits and a share of overheads, divided by expected billable hours per year.
Core process 2: Timesheets
Timesheets are the raw material of project accounting. Practical rules that make them work:
- Log time daily or weekly against project and task, not monthly from memory.
- Include non-billable categories (internal, training, pre-sales, bench) so utilisation is measurable.
- Manager approval before time is costed or billed.
- Reminders and a cut-off date tied to payroll or month-end close.
Core process 3: Utilisation and capacity
Utilisation = Billable hours / Available hours
If a design engineer has 2,000 available hours in a year (after leave and holidays) and logs 1,500 billable hours, utilisation is 75 percent. Utilisation is the most powerful lever on a services P&L. For a 60-person firm with an average cost of ₹1,000 per hour, a 5-point increase in utilisation across the team is 60 x 2,000 x 5% = 6,000 more billable hours. At an average billing rate of ₹1,800, that is ₹1.08 crore of additional revenue capacity with no additional salary cost.
| Role | Target utilisation | Actual (YTD) |
|---|---|---|
| Principals | 50% | 46% |
| Senior engineers | 70% | 72% |
| Design engineers | 80% | 68% |
Low junior utilisation, as in this hypothetical table, often points to work being done by seniors that could be delegated, or to a sales pipeline that is not keeping the team busy.
Core process 4: Billing methods
| Method | How invoices are generated | Typical in |
|---|---|---|
| Fixed fee by milestone | On completion of agreed milestones (for example, 20% at concept, 40% at detailed design) | Engineering, architecture, implementation projects |
| Time and materials | Approved hours x billing rate, plus expenses | IT services, consulting, support |
| Retainer | Fixed monthly fee, sometimes with an hours cap | Agencies, advisory, AMC |
| Unit or deliverable based | Per drawing, per site, per report | Surveys, testing, inspection services |
The ERP should generate draft invoices from the source data (milestones achieved, approved timesheets, recurring schedules), so billing is not delayed waiting for someone to compile it. Faster billing directly improves cash; see our playbook to reduce debtor days.
Core process 5: Unbilled revenue and revenue recognition
Service firms often deliver work before they can invoice it. Under the applicable accounting standards (Ind AS 115 for Ind AS companies; AS 9 or, for construction-type contracts, AS 7 under Indian GAAP), revenue for services is generally recognised as the work is performed, often measured by the stage of completion, rather than when the invoice is raised. The difference shows up as:
- Unbilled revenue (a contract asset) when work done exceeds billing.
- Advance from customers or unearned revenue (a contract liability) when billing or receipts exceed work done.
Example
On the ₹48 lakh project, by 31 October the firm has incurred ₹20.4 lakh of the ₹34 lakh budgeted cost (60 percent) and invoiced ₹19.2 lakh (40 percent milestone). Using cost-based stage of completion, revenue earned = 60% x ₹48 lakh = ₹28.8 lakh. Unbilled revenue = ₹28.8 lakh minus ₹19.2 lakh = ₹9.6 lakh. The method and estimates should be agreed with your auditor; if the total cost estimate rises, the stage of completion and margin must be revised, and expected losses on a contract provided for.
Core process 6: Project profitability reporting
| Project | Contract (₹ lakh) | Cost to date | Estimate to complete | Forecast cost | Forecast margin |
|---|---|---|---|---|---|
| Design project A | 48.0 | 20.4 | 16.0 | 36.4 | 24% |
| Plant study B | 22.0 | 14.5 | 9.0 | 23.5 | (7%) |
| Retainer C (annual) | 30.0 | 12.1 | 13.5 | 25.6 | 15% |
Project B is heading for a loss. The earlier this shows up, the more options there are: a change order for scope added by the client, a staffing change, or at least a lesson for pricing future studies.
Core process 7: Expenses and subcontractors
Travel, site expenses and subcontractor bills should be tagged to projects at entry, with reimbursable expenses flagged for re-billing to the client. Subcontractor costs often carry TDS, so the vendor master needs the correct section. Expense claims from employees should require a project code.
Change orders and scope creep
Fixed-fee projects lose money most often through scope creep: the client asks for "one more option", an extra site visit, or a design revision outside the agreed scope. A services ERP should make scope visible:
- Track hours against each phase and task budget, so overruns show up weekly rather than at the end.
- Log change requests against the project with estimated hours and value.
- Convert approved change requests into change orders that increase contract value and billing milestones.
- Report hours spent on unapproved changes separately, so the project manager can raise them with the client.
In the plant study example above, if 120 of the extra hours relate to additional scope the client requested, a change order at the agreed rates can turn a loss into a small profit, but only if the hours were logged against the right task.
Cash flow in project businesses
Service firms pay salaries monthly but often bill on milestones that arrive every two or three months, with clients paying 30 to 90 days after invoice. The gap can be large. Practical levers:
- Negotiate a mobilisation advance at project start.
- Break large milestones into smaller ones, or add monthly progress billing.
- Invoice the day a milestone is achieved, with the client's acceptance attached.
- Track unbilled revenue weekly; rising unbilled balances signal billing delays.
Services ERP selection checklist
- Projects with phases, tasks, milestones and budgets by role and expense type.
- Timesheets with approval, linked to projects and tasks, including non-billable categories.
- Utilisation and capacity reports by person and role.
- Billing by milestone, time and materials, retainer and deliverable, generated from source data.
- Unbilled revenue and project WIP reporting.
- Project profitability with estimate to complete.
- Expense and subcontractor costs tagged to projects, with TDS handling.
- GST invoicing for services with correct place of supply.
- Integration with payroll cost data for accurate cost rates.
Frequently Asked Questions
What is project accounting?
Project accounting tracks revenue, costs, billing and profitability for each project separately, using timesheets, expenses and budgets, so management can see which projects and clients are profitable.
What is unbilled revenue?
Revenue earned for work performed that has not yet been invoiced to the client. It is recorded as a contract asset and billed when milestones or billing dates are reached.
How do service companies calculate utilisation?
Divide billable hours by available hours for a person or team over a period. Available hours exclude leave and holidays; non-billable work reduces utilisation.
Do service companies need inventory in their ERP?
Usually little or none, except for firms that install equipment or use materials on projects. The emphasis is on projects, time, billing and expenses.
How do I set cost rates for project costing?
Take each role's annual cost (salary, benefits and an overhead share) and divide by expected billable hours. Review rates annually after salary revisions.
How Fininvo Helps
Fininvo's projects module lists project planning, timesheets, resource allocation, milestone tracking, budget tracking, project billing and profitability analysis, connected to invoicing and accounting. See pricing.
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