Understanding Project Types in Microsoft Dynamics 365 Finance
Why Most Teams Get Them Wrong — and How Capitalization Really Works
Project accounting issues in Dynamics 365 Finance rarely come from missing features or complex configuration.
They almost always start with one early decision that looks operational but is deeply financial: the project type.
Project types are not labels. They define:
- how costs post
- whether revenue exists
- how revenue is recognized
- whether WIP or accruals apply
- whether capitalization is supported — and how
When this choice is wrong, teams compensate with Excel, manual journals, and late audit fixes — all symptoms of weak upstream governance.
Why project type selection matters more than people think
In many organizations, projects are treated as delivery objects: track hours, control costs, move on.
In reality, a project in Dynamics 365 Finance is also an accounting engine.
The selected project type determines:
- which subledgers are involved
- whether costs hit P&L or balance sheet
- whether revenue recognition logic applies
- whether capitalization is even possible
- whether the Fixed Assets module can be used at all
Once transactions start posting, reversing these effects is difficult, risky, or impossible without manual intervention.
This is why project type governance belongs just as much to finance as it does to delivery teams.
(If this sounds familiar, see also: ERP governance fundamentals → https://www.fitgapfinance.com/erp-governance-model-roles-decision-rights/)
Capitalization in Dynamics 365 Finance: an important clarification
Before reviewing the project types themselves, one correction is necessary.
Capitalization is not determined only at the project level.
In Dynamics 365 Finance, capitalization behavior is governed by three layers:
- Project type
- Project cost categories
- Posting and capitalization rules
This means:
- Capitalization can be selective
- Not all costs on a project must be capitalized
- Cost categories play a critical role
However — and this is the key distinction — only one project type supports capitalization through the Fixed Assets module in a native, auditable way.
That project type is the investment project.
The main project types — and what they really do
Fixed-price projects
What they are
Projects where revenue is contractually fixed and recognized based on progress, not invoicing.
Accounting behavior
- Revenue recognized using estimates
- WIP and accruals are central
- Margins depend heavily on estimate quality
Capitalization
- Costs can technically post to balance sheet accounts
- ❌ No integration with the Fixed Assets module
- ❌ No native asset creation or capitalization proposals
What commonly goes wrong
- Using fixed-price projects for asset-building initiatives
- Treating them like time & material “to simplify delivery”
- Discovering margin distortion late in the close cycle
Fixed-price projects are revenue instruments — not capitalization vehicles.
Time & material projects
What they are
Projects where revenue is generated directly from hours and expenses.
Accounting behavior
- Revenue follows transactions
- Less reliance on estimates
- Cleaner operational visibility
Capitalization
- Costs may post to balance sheet accounts
- ❌ No Fixed Assets module integration
- Capitalization requires manual asset creation if attempted
What commonly goes wrong
- Assuming “simple” means “low financial risk”
- Weak timesheet discipline
- Attempting to capitalize delivery work retroactively
Cost projects
What they are
Non-revenue projects used to collect costs.
Typical use cases
- Internal initiatives
- Research or exploratory work
- Temporary tracking needs
Capitalization
- Costs can post to balance sheet accounts
- ❌ No Fixed Assets integration
- Capitalization must be handled manually via journals
What commonly goes wrong
- Using cost projects as a long-term dumping ground
- Forgetting to close them
- Using them where investment projects were clearly required
Cost projects are often overused — and under-governed.
(See also: ERP data quality and structural discipline → https://www.fitgapfinance.com/data-migration-in-dynamics-365-how-to-avoid-the-most-costly-mistakes/)
Investment projects (the critical one)
What they are
Projects explicitly designed to capitalize costs into fixed assets.
Accounting behavior
- Costs post to Work in Progress (WIP)
- Capitalization controlled by cost categories
- Clear lifecycle from cost → asset → depreciation
Capitalization
- ✅ Full, native integration with the Fixed Assets module
- Selective capitalization by category
- Incremental capitalization supported
- Fixed assets created directly from the project
- Strong, auditable project-to-asset traceability
This is the only project type intended for capitalization.
What commonly goes wrong
- Letting IT or PMO decide without finance sign-off
- Mixing capitalizable and non-capitalizable categories
- Discovering capitalization issues during audit season
If an asset is being created, investment projects are not optional — they are a governance requirement.
Manual capitalization: technically possible, strategically weak
A common workaround still appears in many organizations:
- Project costs post to a balance sheet account
- Finance manually creates a fixed asset via a journal
- The project and asset are no longer systemically linked
This approach:
- Breaks the audit trail
- Requires permanent manual controls
- Creates reconciliation overhead
- Often triggers audit comments
It may be tolerated for migration cleanup or legacy constraints, but it should never be the target-state design.
Capitalization rules by project type (summary)
| Project type | Costs can post to balance sheet | Fixed Assets integration | Recommended for capitalization |
|---|---|---|---|
| Investment | ✅ Yes | ✅ Native | Yes |
| Fixed-price | ⚠️ Possible | ❌ No | No |
| Time & material | ⚠️ Possible | ❌ No | No |
| Cost | ⚠️ Possible | ❌ No | No |
A simple decision framework that works
Before creating a project, answer these questions:
| Question | If YES | If NO |
|---|---|---|
| Is revenue expected? | Fixed-price or Time & material | Cost or Investment |
| If revenue exists, is it contractually fixed? | Fixed-price | Time & material |
| If no revenue exists, should costs be capitalized? | Investment project | Cost project |
If this logic is unclear at project creation time, the organization is accepting downstream financial risk by default.
Note: Microsoft Dynamics 365 Finance also defines Internal and Time project types. These project types are intended for planning and time-tracking purposes and do not participate in revenue recognition, capitalization, or core project accounting processes. For clarity, they are intentionally excluded from this finance-focused analysis.
What mature organizations do differently
Organizations with strong project accounting discipline:
- Enforce project type governance
- Require finance sign-off for investment projects
- Define category-level capitalization rules
- Review projects periodically — not just at audit time
- Train project managers on financial impact, not just delivery KPIs
This is not advanced configuration. It is basic financial hygiene.
(Closely related: human and governance failures in ERP programs → https://www.fitgapfinance.com/erp-psychological-resistance/)
Final takeaway
Project accounting failures rarely explode at go-live.
They accumulate quietly — until margins don’t reconcile, assets don’t tie out, or auditors start asking uncomfortable questions.
Very often, the root cause is a single decision made at project creation.
Get the project type right — and everything downstream becomes simpler, cleaner, and defensible.
This article is part of the FitGap Finance – Project Management & Accounting series, focused on finance-first ERP design, governance, and decision-making beyond go-live.
🇫🇷 Version française: https://www.fitgapfinance.com/types-projets-dynamics-365-finance/
