Creating a Project Budget – A Complete Guide for 2020

10 min read

A project without a budget is like a bird without wings. Funding translates a project into measurable and meaningful expenditure and budges the project wheel. Creating your project budget is something you start doing during the kickoff phase of the project management process.

If you work in a project-based company as a manager, preparing and running a project budget will most likely be your full responsibility. At first glance, the whole budget thing might seem intimidating, but eventually, you’ll realize that all you need is a detailed plan or a work breakdown structure as your starting point. In this guide, you’ll discover what is included in a project budget and how to calculate one with or without a system to help you.

 

What is project budgeting?

Let’s define what a project budget is in the first place. 

The budget for a project is plainly the combined costs of all activities, tasks, and milestones that the project must fulfill. It can be displayed as a cost plan and should be approved by all the stakeholders involved in the project.

Before jumping to explain how the budget is developed, it's critical to understand why it's a significant part of any project.

 

Why a project budget is important

There are at least two reasons to explain the importance of having a project budget plan.

First, it’s an essential component of project funding. The numbers will help you tell stakeholders exactly how much money is needed to finish the project and when the money is needed to win the deadline. Another reason you need a budget is to actually get people to work, as well as collect all the equipment and materials necessary to deliver a successful project where all expectations are managed.

Second, a well-planned budget provides the basis for project cost control. Having an end estimate of money to be spent helps you measure the project’s actual cost against the approved budget and see how much costs you’ve burned already. It will give you an understanding of how the project is progressing and if any changes need to be made to the plan.

To wrap it up, a project budget is essential for getting the necessary funding and having full oversight of the project to keep it under control. One way to prepare it is to total the estimated cost of every task, activity, or work package. Doing so you’ll have the information to prepare a cost baseline.

Now, when the purpose of a budget in project management is clear, let’s switch to the practical part and actual advice. 

 

Typical project cost categories

Planning project costs is an essential step in mapping out a project budget. To do so, you’ll need to create a list of timely line items that are relevant for the project. Here’s a table with common project cost categories: 


Project cost category


Example

Human resources Salary rates of full-time and temporary workers
Travelling spendings Anyone who travels from one location to another to do project work (including budget for meals and lodging)
Training fees Conferences, workshops, outside contractors
Material resources All the items your team might need to perform the work, including software, equipment, or other unique materials
Research expenses Studies or data to support your project and deliver the best value
Professional services Legal advice, consultants, market research firms, etc.
Capital expenditures Equipment or technical upgrades to complete the project
Contingency reserves Contingency funds to allow for flexibility and reduce risks of budget overruns, usually 5-10% of the budget

 

Note that some of the costs are often overlooked. Try to think ahead if there are costs related to the project that will come up once it’s complete. For example, training costs to teach users to use a product or maintenance costs.

 

Approaches to estimating a project budget

So, where would I begin? 

There are different ways to estimate the cost of the project, depending on how your company approaches planning.

Bottom-up estimation

Rate the individual parts of the project plan and tot them up

Bottom-up estimation is one of the best and foolproof ways to prepare a project budget. It anticipates estimating individual parts of the project, such as tasks, milestones, or phases and totaling them to get project cost. This method can be applied if you’re at the point of creating a statement of work

The obvious benefit of using bottom-up estimation is that you can easily track at which point the project goes over budget. Having an accurate plan and all costs laid out in front of you, you can see the actual progress of the project.

The downside of this approach is that it takes plenty of time to go down to the smallest detail of the project. If you’re sure you know every grain of the project, bottom-up estimating is a go-to. Also, because it’s very granular, at some point you might suffer from inflation affecting the cost of your estimates.

Top-down estimation

Figure out the total, and then split it into tasks or milestones

Top-down estimation is opposite to the bottom-up approach mentioned above. It starts with the project budget total and involves breaking it down into smaller chunks to allocate a number of hours to milestones.

Top-down estimation might be useful to apply in the early phases of a project to figure out if a client provides a sufficient amount of money to deliver a project.

Otherwise, the main disadvantage of this approach is sloppiness when it comes to estimations. The budget can hardly be determined before you understand the scope of work and have a project plan.

Analogous estimation

Analyze the data in similar projects to decide the cost

If you’re not totally new to project management, you’ve probably managed a few projects before and can tell what works and what doesn’t. Using analogous estimation, you would rely on the budget data and best practices from your previous projects to form an opinion about how much the current one could cost the client. 

There are always similarities between projects, but it doesn’t mean that you should make decisions based solely on them. Every project is unique. In case you haven’t managed projects before, you can derive data from different external surveys as well, looking for rough figures.

It goes without saying that you can’t rely on analogous estimation, as it is not as accurate as other techniques, like bottom-up estimation. But the advantage of analogous estimating is that it’s super quick and is especially useful when there’s limited information about the project.

Parametric estimation

Using data and project variables to suggest the total

In contrast to analogous estimation, parametric approach is more accurate. It takes cost variables or data points from specific parts of the project similar to the one you run. Applying them to the current project, you take more decisions based on data. 

The advantage of this process is that it’s more accurate than the analogous estimation because it employs more than one data set and uses the statistical relationship between historical data and variables.

The disadvantage is that with digital projects it’s often hard to find useful data points.

Three-point estimation

Take the best, worst, and most likely case estimates to do the average

Three-point estimation is one of the most sensible and pragmatic techniques as it takes into account a weighted average based on the best, worst, and most likely case budget scenarios and encourages you to think from multiple perspectives. Thus you can figure out a realistic cost estimation.

The upside of the three-point estimation technique is that you can reduce the risk of going over budget, as it will be indicated in your plan, and eventually deliver on expectations. 

There are no substantial disadvantages of three-point estimation. Sometimes it takes longer to create a budget using this approach, but at the end of the day, it’s worth the effort spent.

Check out these Project Estimation Techniques 101 for a more detailed perspective.

 

How to create a basic project budget in five easy steps

You can use project budgeting methods above, or stick to a simple project budget planning routine. Essentially, these five steps can help you put the finances together and create a project budget summary:

  1. Break down your project into tasks and milestones. Working with your task list will give you an understanding of what you’ll need to accomplish and help you with project cost management. If you already have a task list, that’s fine, and you can start right off. But if you don’t, start writing down everything that your team needs to do. 
  2. Estimate each element in the task list. Now it’s time to give each element that you’ve written down an optimistic estimation. At this point, identify all the resources and materials you’ll need to perform well and include them into your estimate when calculating the price. 
  3. Add your estimates together. This is probably one of the easiest parts of the project budgeting process, especially if you have a spreadsheet with two columns: Tasks and Costs. Then, you’ll be able to calculate the total fast. 
  4. Add contingency and taxes. Better safe than sorry. Of course, you can’t be 100% confident about the final estimate, as things change all the time. By adding contingency and taxes, you make sure that the project doesn’t go over budget and your estimate number is closer to the final costs you eventually spend. If you don’t know how much contingency to add, project management experts recommend going for 10% of the total.
  5. Get approval. Talking to your manager to approve project costs would be the last thing in the project budget creation process. 

 

Learn from the experts: The best budgeting practices

Now when you know the basics, it's time to learn from the experts. We’ve talked to experienced project leaders and researchers and they shared their best practices and things to count in when creating a budget for a project.  

Taoufik Samaka, Doctorate Researcher at Toulouse Business School:

Many budget slippages come from not taking the project risks seriously. Therefore, I would recommend a discussion with the risk manager to go through all eventual risks and potential opportunities, evaluate them by probability (likelihood to happen) and impact by value (if the risk happens, what would be the impact on the project in monetary value?). Also, evaluate the different strategies to handle the risk (accept, avoid, transfer, mitigate, exploit), define mitigation activities, reserve a contingency to handle your risks that are to be addressed. Project managers need to re-evaluate the risks on a regular basis and update the budget accordingly. A methodic risk management approach would help you cover risks related to all project process groups (most importantly: scope, schedule, cost, quality, resources, stakeholders).

Marco Donoso, IT Project Manager:

Besides using an appropriate estimation technique, like bottom-up, it is generally recommended to consider “contingency reserves” for known risks, and “management reserves” for unknown risks. So, for the first one, it is enough if you do good risk management by focusing only on risks that really matter and need a response plan. For the other one, it would be enough if you assign a % according to your company or business. For example, global companies usually put 5% for that.

Rogerio Manso, Senior Project Manager:

To budget a project it is critical that the project manager has clarity on three points.

  • Project scope: It should be very clear about customer expectations to avoid any scope changes throughout the project.
  • Resource availability: One of the biggest causes of budget failure is due to poor planning of resource availability. Holidays, illness, layoffs, resource replacements, working on multiple projects at the same time always have an impact on the budget.
  • Risks: As already mentioned, it is important to pay close attention to risk management. No project is free of risks and impacts on budgets.

Finally, it is important to have good control of the project plan so that deviations are fixed quickly and not to have a major impact on the final budget.

 

Cassandra Mack, Senior IT Leader:

Take the time to find out who the "missing" stakeholders are. They are the ones that never hear about the project until later on and are indeed key to either getting something done or knowing where the bodies are buried that will cost you money, time, or some kind of resource tax later on in the project if you don't know about it upfront. You want to eliminate as many of those surprise eaters of contingency as possible. Don't be lazy with the risk management process. If you are lazy, you will end up eating your management reserves and will have to go back to the well to beg for money later on.  

Don't be afraid to chunk the project into phases. You can't realistically budget for any known issues/risk farther out than the reasonably foreseeable future (depending on your line of work and forecast capabilities). If you are forced to do a multi-year budget, then add a confidence level for the pieces that are further out so you can quantify how much and what quality of data you have on hand. Chunk it up and you'll get better budget estimates and be able to adjust as you go with reasonable certainty.

 

Neil Woodger, Global Transformation Leader:  

Ensure that you have very strong requirements and that they are fully agreed and signed-off. Scope creep is the biggest eater of the budget as a project moves forward.

 

Charles W. McBride, Project Leader:

Step away from the budget, sleep on it for a night, and take a hard look at each of those numbers again when you are fresh, asking a simple question: What did I/we miss?

We all miss something at one time or another, sometimes it’s big, sometimes it’s small. Strive to take the appropriate amount of time to always double-check all of your budgetary assumptions. Your reputation and your blood pressure will thank you later.

 

A checklist of things to create a project budget

There are many factors to take into account during a project budgeting process. Make sure you can answer the following questions: 

  1. Can I define the project and its end goal? 
  2. Are there any ground rules, constraints, and assumptions I should consider?
  3. Do I have sources of data (Task List, WBS, Cost Estimates, Schedule) to rely on? 
  4. Is the estimating methodology in use acceptable?
  5. Do I know who is going to work on the project? 
  6. Do I have a list of resources and their rates to complete the project? 
  7. Can I compare my estimate against the best practices industry standard? 
  8. Do I have contingency reserves to account for risk? 
  9. Who are the key project team members to help me in estimating/budgeting process? 
  10. Am I on the same page with Project Stakeholders? 
  11. Can I compare the budget with original estimates and reconcile differences?

 

How Project Management Systems Can Help 

As you can see, the budget is an important part of planning and controlling your project. While you can manage to create project budgets manually, you’ll be more precise using project management software with budgeting features, especially if it’s a large project with tons of milestones and dependencies you’re running. 

Project management systems like Forecast would calculate the budget for you based on the scoped out project. As soon as it’s approved by stakeholders and you have the Statement of Work defined, everything’s ready to start working. A scoped out project in Forecast is not just the recipe of your project full of tasks and milestones. It's also the scope that takes into account how long your previous projects have taken you, the roles you need to conduct the project.

The software learns from your previous projects and lets AI help you estimate each task. All in one, the platform ensures you have a more precise project scope and a more precise budget in the end.

As soon as it’s approved by stakeholders and you have the Statement of Work defined, everything’s ready to start working.

Forecast's premium plan will provide you with a visual budget that has a fast overview of cost, revenue, and profit. You would be able to see how the time entries and invoices affect the budget and spot if you are on track or not.

Want to know more? Forecast is an AI-powered platform that helps project-based companies look into the future by connecting people and projects with insights and profitability. Continue reading how the platform can help you keep your projects on budget or book a demo on top of the page.

how to keep projects on budget

 

 

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