Project Accounting for Custom Manufacturers: A Complete Guide

When a single order takes three months to build, a monthly P&L can't tell you much about it. Costs pile up for weeks, revenue lands in one month, and the margin swings around for reasons that have nothing to do with how the business is doing.

Project accounting fixes that. It treats each big job as its own small business, with a budget, a cost-to-date, a billing schedule and a forecast to finish. This guide covers how to set it up for a custom manufacturer, how revenue on long jobs works, and what a monthly WIP schedule looks like, with illustrative numbers.

This is general information, not accounting or tax advice for your company. How your contracts should be treated is a call to make with your CPA, and we coordinate with them on it.

What is project accounting, and why does it look different for custom manufacturers?

Project accounting tracks cost, billing and revenue by project rather than only by month. It's job costing with a longer time frame and a few extra pieces: deposits, progress billing, change orders and revenue that may be recognized as the work is done.

For a job shop turning work in a week, plain job costing is usually enough. The job opens, closes and gets invoiced in the same month or close to it.

It's different for engineered-to-order equipment, large fabrications, tooling programs or anything that runs for months. Those jobs need a budget by phase, a forecast to finish that gets updated, and a clear view of billing against cost. Otherwise a project can be losing money for two months before anyone sees it.

What are the core components of a project cost system?

The same cost types as any job, organized by phase:

• Engineering and design hours. Often the first cost on a custom project, and the easiest to forget to charge.
• Material. Purchased parts and raw material, charged to the project when bought or issued, with the purchase order carrying the project number.
• Shop labor by phase. Fabrication, machining, assembly, test. Hours at the loaded rate.
• Outside processing and subcontract work. Plating, heat treat, controls integration, installation crews.
• Applied overhead. At your normal rate per labor or machine hour.
• Project-specific costs. Freight, crating, travel for installation, special tooling.

Set up a cost code for each phase in your system. Then the budget, actual and forecast can all be compared phase by phase. Our guide to calculating labor and overhead cost covers the rates.

How does job costing connect to the estimate?

The quote becomes the project budget. Each phase in the quote becomes a cost code with a budget in hours and dollars.

Every month, for every open project, you compare three numbers per phase: budget, cost to date, and estimated cost to complete. Budget minus (cost to date plus cost to complete) is the projected overrun or underrun.

The estimate to complete is the part people skip. Cost to date alone tells you nothing about whether you'll finish on budget. You need someone who knows the project to say what's left. For a single job that's running over, the breakdown in when job costs go over budget applies phase by phase.

How should you bill a long project?

On long projects, billing is a cash question first. If you buy material and pay the crew for three months before invoicing, you're financing the customer's project.

Common structures are a deposit at order, milestone billings (design approval, material received, factory acceptance test, shipment), and a final payment, sometimes with a retainage held back until installation or acceptance.

I'd try to get billing at least close to cost. A deposit that covers long-lead material is the most valuable piece. Whether you can get it depends on your customers and your market. But it's worth asking, and worth writing into your standard terms.

Keep billing separate from revenue in your head. What you've invoiced and what you've earned are two different numbers on a long project. The difference goes on the balance sheet, as explained below.

How do you recognize revenue on long-duration jobs?

Under US GAAP, revenue from contracts with customers follows ASC 606. A key question is whether you satisfy the contract over time or at a point in time, such as shipment.

ASC 606-10-25-27 says revenue is recognized over time if any one of three criteria is met. For a custom manufacturer the one that usually matters is the third: your work creates an asset with no alternative use to you, and you have an enforceable right to payment for performance completed to date. Deloitte's summary of the over-time criteria walks through it.

Both parts matter. "No alternative use" means you couldn't practically sell the item to someone else without significant cost or rework, or the contract stops you. "Right to payment" means that if the customer cancels for reasons other than your failure to perform, you can recover costs to date plus a reasonable margin. Deloitte notes that a deposit alone generally doesn't establish that right, and if the contract is silent, you generally presume there isn't one.

So the answer often depends on your contract terms, not just what you build. Two shops making the same machine can land differently because of their cancellation clauses. This is worth reviewing with your CPA and, if needed, your attorney.

If the over-time criteria aren't met, revenue is recognized at a point in time, typically when control passes to the customer. Costs build up in work in process until then.

When revenue is recognized over time, an input method is common for custom manufacturing, for example cost incurred to date as a share of total expected cost. That's the cost-to-cost method in the example below.

A worked example of revenue over time

Illustrative project. A custom machine sells for $480,000. Estimated total cost is $360,000, so planned gross profit is $120,000, or 25%. Assume the contract meets the over-time criteria.

End of month 3. Cost to date is $144,000. Estimated total cost is still $360,000.

• Percent complete: $144,000 / $360,000 = 40%.
• Revenue to date: 40% x $480,000 = $192,000.
• Gross profit to date: $192,000 - $144,000 = $48,000.

End of month 4. Cost to date is $234,000. Engineering changes push estimated total cost up to $390,000.

• Percent complete: $234,000 / $390,000 = 60%.
• Revenue to date: 60% x $480,000 = $288,000.
• Gross profit to date: $288,000 - $234,000 = $54,000.
• Gross profit for month 4: $54,000 - $48,000 = $6,000.

The cost increase is taken as a catch-up in the month you learn about it. That's why month 4 shows only $6,000 of profit. The project's expected margin dropped from 25% to ($480,000 - $390,000) / $480,000 = 18.75%.

This is also why the estimate to complete matters so much. If nobody updates the $360,000 estimate, month 4 looks fine and the hit lands later, all at once.

If a project is expected to lose money overall, the loss may need to be recorded as soon as it's known rather than spread out. Confirm the treatment with your CPA.

What is a WIP schedule?

A WIP schedule is a one-page monthly report with every open project on a row. It's the most useful project accounting report I know of, for owners and for lenders.

Column	Month 3 example
Contract price (with approved change orders)	$480,000
Estimated total cost	$360,000
Cost to date	$144,000
Percent complete	40%
Revenue earned to date	$192,000
Billed to date	$240,000
Billed ahead of revenue (contract liability)	$48,000

In this example the customer paid a 30% deposit ($144,000) and a 20% design-approval milestone ($96,000), so $240,000 is billed. Revenue earned is $192,000. The $48,000 difference sits on the balance sheet as a liability, because you've been paid for work you haven't done yet.

By month 4, revenue earned is $288,000. If billing is still $240,000, you've earned $48,000 more than you've billed. That shows up as a contract asset, often called unbilled revenue.

Being billed ahead is good for cash. Being billed behind means you're funding the project. If the schedule shows you behind on most projects, look at your billing terms. Lenders who see a WIP schedule tend to ask about exactly this.

What does a long project do to cash?

The P&L view and the cash view of a project can look very different. It's worth running both.

Stay with the same illustrative project and assume costs are paid roughly as they're incurred. By the end of month 4 you've spent about $234,000. If the customer paid the deposit and the design milestone, you've collected $240,000. Cash on the project is about even.

Now take the deposit away. Same work, but the only payment so far is the $96,000 milestone. You've spent $234,000 and collected $96,000, so the business is carrying about $138,000 of the customer's project. The revenue and margin on the P&L are identical in both cases. The bank balance is not.

If you have two or three of these projects open at once, that difference decides whether you lean on the line of credit. So I'd put a simple cash line on the WIP schedule: cash collected minus cost paid, by project. It's the number your banker will ask about anyway. Our post on cash flow forecasting covers how to roll it into a company-wide forecast.

How do change orders fit in?

On long projects, changes are normal. The customer revises a spec, adds an option, or moves a date.

Each change needs its own price and approval in writing before the work is done. Once approved, update the contract price and the budget on the WIP schedule. If you do the work but the price isn't agreed yet, track it separately so the project doesn't look like it's simply running over.

Unapproved changes are one of the most common reasons a project's margin quietly disappears. Whether they can be counted as revenue before approval is an ASC 606 question with its own rules. The safe habit is to get them approved fast.

How do you set up project accounting step by step?

1. Number every project before any cost. The number goes on POs, time entries, vendor bills and invoices.
2. Load the quote as the budget, by phase. Hours and dollars for engineering, material, each shop phase, outside work, and project costs.
3. Set up the billing schedule. Deposit, milestones, retainage. Tie each milestone to something you can prove happened.
4. Capture cost by phase. Daily time entry by project and phase. Material charged when bought or issued.
5. Update the estimate to complete monthly. The project lead owns it. Finance checks it against the trend.
6. Run the WIP schedule at month-end. Book the revenue and the contract asset or liability, and tie total project cost to WIP and cost of goods sold.
7. Close the project formally. Final cost, final margin, and one paragraph on what to quote differently next time.

For the accounting setup underneath (chart of accounts, overhead rates, WIP tie-out), see how to set up a job costing system for manufacturers. For software, our QuickBooks vs NetSuite vs Fishbowl comparison covers which tools handle projects and phases well.

Using project data to improve your quotes

Closed projects are expensive lessons. Use them, even when the project went well. Good projects teach you what to keep doing.

Compare budget to actual by phase across several projects. If engineering runs over on every custom machine, that's a quoting assumption, not bad luck. If installation always runs long at customer sites, price it differently or quote it separately.

The bidding side of this is covered in how to use job cost reports to sharpen bidding accuracy. The principle is the same for projects, just with fewer, bigger data points.

What mistakes undermine project accounting?

• No estimate to complete. Without it, percent complete is wrong and margin shows up late.
• Engineering hours not charged to the project. They land in overhead and the project looks better than it was.
• Billing confused with revenue. A big deposit isn't earned revenue.
• Unapproved changes. Work gets done, cost shows up, price doesn't.
• Admin costs pushed onto projects. Office salaries and general software belong in overhead or SG&A, not on a specific project.
• WIP that doesn't tie. If the project reports don't add up to the balance sheet, nobody trusts either.

More of the cost-side misses are in hidden job costing mistakes manufacturing owners make.

How we help

We run project accounting for custom manufacturers as part of our manufacturing accounting and outsourced controller work: budgets by phase, the monthly WIP schedule, revenue entries, and the tie-out to the financials. We coordinate with your CPA on the revenue recognition policy.

Our pricing and margin analysis then looks at closed projects to show where quotes and actuals drift apart. We work often with metal fabrication and engineered equipment builders. Happy to jump on a call if helpful.

Frequently Asked Questions

What's the difference between job costing and project accounting?

Project accounting is job costing plus billing, revenue timing and a forecast to finish. It's the better fit when a single order runs for months, and job costing alone is usually enough for short jobs.

Do custom manufacturers recognize revenue over time or at shipment?

It depends on the contract. Under ASC 606, revenue is recognized over time if, for example, the item has no alternative use to you and you have an enforceable right to payment for work done to date, so review your terms with your CPA.

What is a WIP schedule?

It's a monthly report listing each open project with contract price, estimated cost, cost to date, percent complete, revenue earned and amount billed. It shows whether you're billed ahead of or behind the work.

What does it mean to be underbilled on a project?

It means you've earned more revenue than you've invoiced. That shows up as a contract asset, and it usually means your cash is funding the project.

How often should I update the estimate to complete?

Every month for every open project, and right away when something big changes. A stale estimate makes percent complete and margin wrong.