Project-based expense tracking for startups: move beyond spreadsheets to protect your runway

What Is Project-Based Expense Tracking?

For many early-stage startups, financial tracking starts and ends with a single, company-wide profit and loss statement. But as you begin to manage multiple client engagements, R&D initiatives, or service contracts, a simple P&L hides a dangerous reality: some of your projects are profitable, and others are quietly draining your runway. The scramble to figure out which is which using a mess of disconnected spreadsheets and invoices often begins too late. Learning how to track project expenses for startups is not just an accounting exercise; it is a core competency for survival. It provides the clarity needed to price proposals correctly, allocate resources effectively, and report to investors with confidence.

At its core, project-based expense tracking, also known as job costing, is the process of assigning revenues and costs to specific jobs or projects. This creates a separate, project-level P&L that lives alongside your main company P&L. While the company P&L tells you if the entire business is profitable, a project P&L tells you if the work you did for Client A or on R&D Initiative B was actually profitable.

This distinction is not just academic. A scenario we repeatedly see is a services company celebrating a record revenue quarter, only to find their cash reserves have dwindled because two of their five big projects were severely underpriced. Their company P&L showed a profit, but the underlying project-level losses were eroding their cash balance. A formal system for project expense management helps you spot these issues early.

When Do You Need Job Costing?

The critical question for founders is when to move beyond basic, company-wide tracking. The need for a formal system becomes acute when a company is running more than three to five distinct projects simultaneously. At this point, spreadsheets become unreliable, mistakes start to compound, and the manual effort required to produce accurate reports becomes unsustainable.

To begin, you must distinguish between two types of costs:

• Direct Costs: These are expenses tied exclusively to a single project. Examples include the salary of a consultant working 100% on one client, materials purchased for a specific R&D experiment, or a software license used only by one project team.
• Indirect Costs (Overhead): These are shared business expenses that are not tied to a single project. Common examples include office rent, management salaries, marketing costs, and general software subscriptions like Microsoft 365.

A core part of project expense management is learning effective cost allocation methods to assign a fair share of these indirect costs to each project. Without this step, you will consistently overestimate your profitability.

Core Capabilities: What a Good System Delivers

Moving beyond spreadsheets is about solving specific business problems, not just adopting new technology. A well-implemented system for project cost tracking delivers three core capabilities that directly impact your decision-making and reporting.

1. Accurate Cost Capture at the Source

A robust system enables accurate cost capture the moment an expense enters your financial ecosystem. This means every vendor invoice, employee expense claim, and timesheet entry is tagged to a specific project from the very beginning. For example, when an invoice for a specific software license arrives, your process should ensure it’s coded not just to a general “Software Subscriptions” account, but also to the specific project that required it.

This same principle applies to your most significant expense: labor. Implementing time tracking for projects is essential for accurate labor cost allocation. You do not need perfection. The reality for most pre-seed startups is more pragmatic: consistent time tracking with 85% accuracy is a sufficient and effective starting point for gaining meaningful insights and supporting compliance requirements.

2. Meaningful Project Profitability Analysis

Once direct and indirect costs are captured correctly, you can generate a clear P&L for each job. This analysis is where you must account for overhead. Simply ignoring indirect costs gives you a false sense of profitability. A common approach is to allocate overhead based on labor hours or headcount. For instance, if Project A uses 40% of the team’s hours in a given month, it gets assigned 40% of that month’s rent and administrative salaries.

This is vital, as a study from the Journal of Accountancy found that indirect costs can account for 30-50% of a project's total cost in many project-based businesses. Understanding this true, fully-loaded cost is essential for pricing future work and identifying which types of projects are most valuable to your business.

3. Streamlined Reporting for Stakeholders

Whether you are reporting to investors or applying for government programs, auditable project-level data is non-negotiable. This is particularly true for deeptech and biotech startups seeking innovation incentives. In the US, for example, Section 174 of the IRC and US GAAP affect how certain R&D costs must be treated for tax and accounting purposes. Compliance requirements vary by jurisdiction and can change with new legislation.

Similarly, in the UK, the HMRC R&D scheme is a key driver for project-based cost tracking, as claims must be substantiated with detailed cost breakdowns per project. In Canada, the SR&ED program has similar requirements, making this a global best practice for innovative companies. For those operating internationally, KPMG's overview is helpful for comparing the capitalization of R&D costs under IFRS and US GAAP.

How to Track Project Expenses: A Staged Approach for Startups

Adopting project-based expense tracking does not require a massive, expensive system from day one. What founders find actually works is a staged approach that matches the system’s complexity to the company’s growth. This avoids over-investing in tools you do not need yet and builds a scalable financial foundation.

Stage 1: Good Hygiene (Pre-Seed to Seed, 1–3 Projects)

At this early stage, the focus is on discipline over tools. Your existing accounting software, whether it is QuickBooks or Xero, is perfectly capable if configured correctly. The key is setting up your Chart of Accounts and tracking structure to support project-level detail from the start. In QuickBooks, this is done using the 'Classes' feature. In Xero, you use 'Tracking Categories'.

For instance, a biotech startup might structure its R&D expense accounts like this:

6000 R&D Expenses (Main Account)
6010 Salaries & Wages
6020 Lab Supplies & Consumables
6030 Contract Research Org. Fees

They would then create a Class (QuickBooks) or Tracking Category (Xero) for each research program, such as “Compound Discovery Program X” and “Platform Tech Development Y.” When a bill for lab supplies comes in, the process is simple:

1. Code the expense to the correct account, such as 6020 Lab Supplies & Consumables.
2. Tag the expense with the appropriate project Class or Category, such as “Compound Discovery Program X.”

This simple discipline creates the data foundation for all future analysis. See our R&D expense categorization guide for more on structuring R&D accounts for tax and reporting purposes.

Stage 2: The Connected System (Seed to Series A, 3–5+ Projects)

This is the point where spreadsheets for time tracking and expense approvals start to break. The manual effort becomes overwhelming, and errors multiply. The goal here is not to replace your accounting system but to connect it to other specialized tools that automate data capture. This typically involves a dedicated expense management tool that syncs with QuickBooks or Xero, or a time-tracking platform that automatically pushes labor cost data.

Consider a UK-based deeptech startup developing a novel manufacturing process. They need to file for R&D tax credits under the HMRC scheme and must prove which costs relate to which R&D project.

• The Problem: Their Xero P&L shows a single large number for salaries and materials, making it impossible to substantiate their claim without weeks of manual spreadsheet work.
• The Connected Solution: They set up Tracking Categories in Xero for “Project Alpha” and “Project Beta.” They adopt a simple time-tracking tool that integrates with Xero, requiring engineers to log hours against a project. When vendor invoices for materials arrive, they are coded directly to the relevant project in their expense management software, which syncs to Xero. Shared overhead is allocated monthly based on the percentage of engineering hours logged to each project.
• The Outcome: At year-end, they can instantly run a P&L report in Xero filtered by Tracking Category. This provides a clear, auditable breakdown of expenses for their R&D claim, saving dozens of hours of manual work and reducing compliance risk.

Stage 3: Automated Insights (Series A and Beyond)

As you scale to manage dozens of projects and a growing team, the need shifts from just tracking costs to gaining real-time insights. You need to know if a project is trending over budget before it happens, not a month after the financial close. This is when dedicated job costing software or more advanced modules within larger Enterprise Resource Planning (ERP) systems become necessary.

These systems provide real-time dashboards for budget vs. actuals, resource utilization, and cash flow forecasting on a per-project basis. They solve the pain point of making critical pricing and resourcing decisions with outdated information. However, this step is only effective if the foundational discipline from Stage 1 and the connected data flows from Stage 2 are already in place. A sophisticated system cannot fix a broken process.

Key Steps to Improve Your Project Tracking

Implementing a robust system for project expense management is a gradual process that builds on itself. It starts not with buying new software, but with establishing financial discipline within the tools you already use. The goal is to gain the visibility you need to protect your runway and make smarter decisions about where to invest your time and capital.

Your immediate next steps should be pragmatic:

1. Assess Your Complexity: If you are consistently managing more than three distinct projects, it is time to formalize your tracking system beyond a simple company-wide P&L.
2. Review Your Core Setup: Open QuickBooks or Xero today. Can you use Classes or Tracking Categories to tag every single expense and invoice to a project? Setting this up is the most important first step you can take.
3. Address Labor Costs: Labor is your biggest expense. Start a simple, mandatory time-tracking process for any staff working on specific projects. Aim for that 85% accuracy benchmark; it’s more than enough to provide directional insights into project profitability and support R&D claims.

Building this capability early does not just solve today's reporting headaches. It creates a scalable financial infrastructure that supports your company’s growth for years to come. For more detail on R&D compliance, see our guide on R&D expense tracking under Section 174. Visit the Expense Categorization hub for related guides.

Frequently Asked Questions

Q: What is the difference between project accounting and regular accounting?
A: Regular accounting focuses on the overall financial health of the entire company, producing a single P&L. Project accounting, or job costing, goes a level deeper by tracking revenues and costs for individual projects. This allows you to generate a separate P&L for each project to assess its specific profitability.

Q: Do I need an accountant to set up project expense tracking?
A: While a fractional CFO or accountant can accelerate the setup, a founder can begin by using features like 'Classes' in QuickBooks or 'Tracking Categories' in Xero. The key is establishing the discipline to tag every transaction to a project. An accountant becomes more critical as you introduce cost allocation methods for overhead.

Q: How often should I review project profitability reports?
A: For active projects, you should review profitability on at least a monthly basis as part of your financial close process. This cadence allows you to spot budget overruns or pricing issues early enough to take corrective action. For long-term projects, a high-level review at the board or management level should happen quarterly.

Q: Can I track project costs without time tracking?
A: You can track non-labor direct costs like materials and software without time tracking. However, since labor is the largest expense for most startups, especially in services and R&D, failing to track time means you cannot accurately measure project profitability. Even simple, high-level time tracking provides critical data for decision-making.