Chapter 2
The Components of a
Project-Based ERP System
In This Chapter
▶ Following the financials
▶ Getting paid for your project
▶ Tracking time and people
▶ Complying with the rules
▶ Documenting goods and materials
▶ Tying it all together
Then it comes to ERP systems and tools, project-based businesses have needs that are a lot different from other organizations. Each project is different, and a project- based business must be able to manage each one effectively despite variation. For that to happen, ERP tools must be able to manage and track information at the project level. In this chapter, we give you a closer look at the parts and pieces of ERP systems that are built specifically to handle projects.
Following the Money
You wouldn’t be in business unless you were making money, and you’ll be most successful if you keep close tabs on finan- cial matters. Financials typically include such specific applica- tions as the general ledger, accounts payable (the people you owe), accounts receivable (the people who owe you), and bill- ing. In the project world, you need your financial tools to give you the ability to track your financials at the project level.
For example, if you want to track the profitability of a specific project, you need to know your revenue from that project (how much do you expect to be paid?) as well as that proj- ect’s specific costs (including labor, materials, and other expenses) — the difference between those two numbers is that project’s profit. Sounds simple enough, but if your ERP system can’t track those costs and revenues at the project level, finding the difference isn’t really all that easy.
Many ERP and financial management systems have been designed to meet the general needs of all types of businesses and don’t have the ability to easily track costs for specific projects. This often means companies need to make the standard Chart of Accounts into a complex project-tracking system. Doing so creates reporting and auditing nightmares for project-based businesses, especially in industries and situ- ations where compliance is vital to success (such as if your organization is a public company).
Making Sure You Get Paid
What’s so hard about this? Just send out the bills and watch the cash flow in, right? Not necessarily. For project-based businesses, billing can present special challenges. Clients often specify exactly how they want to be billed and what the rules are for billing each project. Those rules may vary greatly from project to project. Your challenge is to be able to bill in whatever format your client wants.
Most generic ERP systems offer just a couple billing types. They’re designed for industries where clients don’t care what the invoice looks like. In the project world, that is not the case —
you have to follow the client’s billing rules.
For example, one project may be billed at 25 percent of the total project fee for each of the next four months. Another project may be billed when key milestones are completed. Your billing tools need to allow for different billing rules to be established for each individual project.
Then there are the invoice formats. One client may ask for detailed invoices showing every task completed and every employee who worked on the project, while another client may be fine with a summary invoice that has no detail. Again, if you want the business, you must be able to address these client requests, and generic ERP systems simply can’t support flexible billing requirements.
Don’t create special invoices using spreadsheets or word pro- cessing tools. This approach doesn’t provide an audit trail of the invoice and proper tracking for billing purposes.
If you’re doing projects for customers in another country, you may need to create invoices and receive payments in your cli- ent’s currency. That means your systems need to be able to handle currency translations.
Calculating Time and Expenses Chances are, people are the most important assets of your company. They deliver your projects, which means they’re a cost of completing the project. It stands to reason that in order to understand the profitability of the project (remem- ber, revenue minus costs) you need to know the actual costs, including the all-important people costs. For example, you’ve estimated that Bob will spend 20 hours on a project, but when the project’s over, you need to know exactly how much time he devoted to it. Likewise, you figured Bob would spend $2,000 traveling to visit the client, but what was the actual final cost?
Needless to say, capturing actual time worked on a project can be key to understanding the project’s real costs. That means Bob must be able to easily log how much actual time he spent on a specific project or task, as well as whether he incurred any expenses. You’ll never know the true profitabil- ity without this information.
Even if you outsource your payroll to a payroll provider,
you still need this detailed time information for each specific project.
Beyond tracking profitability, there’s a good chance you’ll need this information for invoicing. For example, say Bob is completing a time and materials type of project — that’s a project for which you bill the client for every hour Bob works as well as every expense he incurs. You quite simply can’t create an invoice without complete details of Bob’s actual work time and expenses.
What if the project is being done for a fixed fee, which means you’re charging a flat rate for the project no matter how much time Bob works on it? You’ll still benefit from capturing time and expenses because doing so will tell you what the true costs are — otherwise, you’ll never know whether the fee you charged was high enough to turn a decent profit.
These days, smartphones are in nearly everyone’s pocket, and the Internet can be accessed just about anywhere. Time capture tools are available on phones and through web browsers, which means your people can log their time any- where and anytime — that increases the odds that they’ll quickly and accurately enter their time against the project.
Working with People and Payroll No matter how much they love the work, all those people working on your projects expect to be paid. This means you’ll need to track employees, pay rates, and benefits, and process your payroll. For project-based businesses, this tracking has two main purposes. The first, of course, is so you can pay them — you can’t keep your employees without issuing pay- checks. The less obvious reason is that this information is key to understanding what your costs are for the work each employee is doing. How much does Bob cost you, and more important, how much does an hour of Bob’s time cost you? Read on to see why this is so important.
Take a look at a simple example. If Bob’s salary is $60,000 per year + $10,000 in benefits, and he gets two weeks of paid vaca- tion per year, that means he’s available for project work for 50 weeks per year and 40 hours per week. His cost could roughly be estimated at $35 per hour ($70,000 ÷ 50 weeks × 40 hours).
Project-based ERP systems help identify costs because they can do a detailed analysis to distribute costs across the proj- ect and organization. In the simple example we’re citing, we didn’t include any overhead — such as building, utilities, and equipment — but a project-based ERP system can help spread all such costs across employees to give you very specific costs for your project resources.
This information is critical because at some point you’ll have to decide how much you’re going to charge for the work. If you know you need 20 hours of Bob’s time and his costs are $35 per hour, that means his pay and benefits cost for the project will total $700, and that’s not including overhead — make sure you charge enough for the project to turn a profit. If you need a large team or the project is going to take a long time, this kind of information helps you decide whether taking on the project will be profitable for your business.
Getting in Compliance
Government contractors and plenty of other companies must meet accounting standards. Generally Accepted Accounting Principles, or GAAP, is the name of a common set of account- ing principles, standards, and procedures that companies follow when they compile their financial statements. GAAP is the commonly accepted way to record and report accounting information. It was created from a combination of authorita- tive standards (set by policy boards).
GAAP ensures a level of consistency in financial reporting and helps investors gain confidence in the financial statements they use when they analyze companies and make their invest- ments. Companies are expected to follow GAAP when report- ing their financial statements in the United States.
IFRS stands for the International Financial Reporting Standards. These standards are designed as a common global language for business affairs, ensuring that company financials are understandable and comparable across international bound- aries. IFRS is progressively replacing the many different accounting standards around the world. Even so, individual countries often adopt their own flavors of IFRS, which means enough nuances exist between countries to make compari- sons a challenge.
To learn more about IFRS and whether your firm will be required to follow its standards, visit www.ifrs.org.
Keeping Track of Inventory
Inventory is a term for materials that a company already has on hand, so making sure you keep track of when such items are used for customers is important. For example, you may need to use a piece of equipment or certain kinds of materi- als specifically for one project. Track these items carefully and add their costs to the overall costs of the project. For instance, Bob’s project is an environmental study that uses a $5,000 test kit. You must make sure that kit is charged to the project along with Bob’s time, or your ability to turn a profit will be impaired.
Putting It on Your Tab
Some projects may require that you purchase specific mate- rials or services from other businesses — you’ll want to tie these items directly to each specific project. For instance, Bob had to order some supplies for his project. A purchase order was entered for the supplies and then purchased and deliv- ered to Bob. Those supplies are part of the overall cost of the project, so you want to make sure the goods are associated with Bob’s project. You don’t want those items charged to the wrong project — or not charged to a project at all.
Make sure your purchasing system is part of or directly tied to your project system. That will reduce the need to enter purchase orders in separate systems and reconcile them back to the project system.
Manufacturing on a Project Basis
Companies that manufacture or refurbish things on a project- by-project basis need specialized software for tracking their shop floor activities, statuses, and completions. We get into more detail on this in Chapter 6, but the project manufactur- ing system should have these components and functionalities:
✓ The manufacturing execution system (MES) should pro- vide online documentation, work instructions, and rout- ing information. This system captures work order status throughout the manufacturing process and supports quality control and nonconformance findings and results.
✓ Shop floor time systems capture start and stop times for shop floor activities. They should also support complex pay rules and schedules, as well as employee self-service scheduling requests and approvals.
✓ Procurement systems help you manage the purchasing and tracking of materials throughout the procurement process. Purchase orders can be completely tracked from planning to approval, purchase, shipment, and receiving.
✓ Sales order entry lets you generate sales orders for products and services while managing the shipment and invoicing process.
✓ Inventory offers the ability to manage asset inventories, project-owned inventories, and customer or government furnished materials (GFM).
✓ Manufacturing supports manufacturing orders, alloca- tion of labor and part costs, and the fulfillment of sales contracts.
A project-based manufacturing system supports Lean and paperless manufacturing processes that help your company be more profitable overall.
Tying the Components Together
In generic ERP systems, components are disconnected, but if you purchase a true project-based ERP, every transaction is connected to an account, an organization, and a project. Yes, a project (see Figure 2-1 for a visual). That ensures that the multiple ledgers within the ERP are all the same, requiring no reconciliation!