Spotting a fixed-fee project overrun early
How a consultancy can compare a fixed-fee project's costs with its budget month by month and see an overrun while there is still time to act.
By Achekam · · 5 min read · For Consulting businesses in South Africa, Nigeria, Kenya
On a fixed-fee assignment, the price stops moving the day the client signs. Costs do not. A workshop runs over, the client's data arrives late and has to be cleaned, a junior consultant needs more review than planned, and each small slip goes onto the firm's account, not the client's.
Most consultancies discover the damage at the end, when the final invoice goes out and someone finally adds up what the project cost. By then nothing can be done: the time is spent and the fee is fixed. The aim is to see the overrun while the project is still running, when there is time to change how it is staffed, or to have an honest conversation with the client about scope.
Compare cost to date with the budget, not with the fee
AccountingTools defines job costing as accumulating the costs of materials, labour and overhead for a specific job. For long jobs, it advises that the cost accountant should periodically compare accumulated job costs with the job budget and warn management early if costs are running ahead of projections. AccountingTools notes that this gives management time either to control costs or to approach the customer about a billing increase.
Its guide to job costing explains how costs are gathered against a job and how labour and overheads are charged to it, which is the groundwork for that comparison.
The comparison that matters is cost to date against budget to date, with a view on what remains. "We have spent most of the budget" means little on its own. "We have spent most of the budget and delivered less than half the work" is a warning worth hearing in month two rather than month six.
Why the final invoice is too late
The final invoice is a record of what happened. AccountingTools draws the line between management accounting, which it describes as future-oriented and focused on spotting issues to improve future performance, and financial accounting, which is historically oriented. An overrun report produced after the project closes is financial accounting. The same numbers, produced monthly while the work continues, become management information.
So set the review rhythm at the start. A short monthly check, run by whoever owns the engagement and looked at by a partner, catches problems while they can still be dealt with.
Staff time is the cost that runs away
In a consultancy, staff time is the main cost of most projects, and it is the one that drifts without anyone signing anything. AccountingTools explains that labour directly traceable to a job is charged to that job as direct labour, while other labour goes into an overhead pool as indirect labour and is allocated to open jobs.
For a consulting firm, that means:
- the hours consultants spend on the client's work are direct labour for the project;
- time spent on internal meetings, business development and administration is indirect;
- a project budget should state hours by grade, not only a money total, so the monthly check can compare hours used with hours planned.
Keep a simple time record per project, even a shared spreadsheet, and close it off on the same day each month. Without it, the cost of staff time on a project is a guess. What sits above the gross margin line explains how that direct staff cost fits into the income statement.
Budgets, commitments and journals in Achekam
The method here uses ordinary accounts, budgets, purchase orders and journals, which is enough for a firm running a handful of significant fixed-fee projects at once.
Accounts for the project's direct costs. Each business has its own double-entry ledger with a standard chart of accounts, and accounts can be added, renamed or switched off. For a large fixed-fee engagement, add expense accounts for its direct costs, such as consultants' time charged to the project, subcontracted specialists and travel, and switch them off when the project closes.
A budget for each of those accounts. A business can set a budget per account and period and compare it with actual figures from its ledger. Spread the project budget across the months you expect the work to happen, so each month's comparison is meaningful.
Commitments before they become costs. If the project uses subcontractors, raise purchase orders for them. Approved purchase orders count as committed spend against budgets per expense account and period, and the screen shows budget, spent, committed and available. Over-committed lines are flagged, though the purchase is not blocked. A subcontract signed in month one therefore shows against the budget straight away, instead of surprising you when the bill arrives in month four.
Staff time moved by journal. At month end, use the time record to post a manual journal moving the project's share of salary cost from the general salaries account to the project's direct labour account. An unbalanced journal, or one dated in a closed month, is refused, and a posted journal is corrected only by a reversal, so the history stays clean.
The monthly view. Management accounts show an income statement for a chosen period beside the period before, and a balance sheet at period end, both added up from the business's own journals and exportable as PDF or CSV. The year-to-date preset starts on 1 January rather than your own year start, so choose the period yourself if your year begins in another month. Partners who review these figures monthly can use management accounts for partners as a guide.
When the numbers say the project is running ahead of budget
An early warning only helps if somebody acts on it. When the monthly check shows costs running ahead:
- Check the measurement first. Has a cost been posted to the wrong account, or a month's time been counted twice?
- Look at what remains. Re-estimate the hours needed to finish, by grade.
- Separate overrun from scope change. Work the client asked for that was not in the statement of work is a scope change, not an overrun.
- Raise scope changes with the client promptly, in writing, with what was asked, when, and what it adds. AccountingTools' point about approaching the customer for a billing increase depends on doing this early, while the request is fresh.
- Change the staffing for genuine overruns. Move routine tasks to more junior staff, or tighten the partner review cycle.
Once the project closes, compare final cost with the original budget and note why they differ. That note is the most useful input to the next fixed-fee quote.
Set up the project accounts and budgets before the next fixed-fee engagement starts, not after its first month.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
