A project budget is a critical tool for startups and businesses of all sizes. Without a solid budget, it can be tough to know where to start and what kind of resources to invest. By following this guide, you’ll create a project budget that will be valuable to your business.
Project Budget Planning Process
What Is a Project Budget?
A project budget is the total projected costs needed to complete a project over a defined period of time. It’s used to estimate what the costs of the project will be for every phase of the project. Creating a project budget is a critical part of the project planning process.
The project budget will include such things as labor costs, material procurement costs and operating costs. But it’s not a static document. Your project budget will be reviewed and revived throughout the project, hopefully with the help of project budgeting software.
Why You Need a Project Budget
The obvious answer is that projects cost money, but it’s more nuanced than that. The project budget is the engine that drives your project’s funding. It communicates to stakeholders how much money is needed and when it’s needed. Project budgets are important for any industry such as construction, marketing or manufacturing, for example.
But a project budget is not only a means to get things that your project requires. Yes, you need to pay teams, buy or rent equipment and materials, but that’s only half the story.
The other part of the importance of a project budget is that it’s an instrument to control project costs. The budget, which is part of your project plan, acts as a baseline to measure your performance as you collect the actual costs once the project has been started.
How to create a complete project budget for your projects
The creation of a project budget is part of the planning phase of project management process groups. Here are the steps to create your own project budget.
Step 1: Identify project scope
Before you can know the costs involved in your project, you must first be clear on the project scope, timelines, and deliverables. For example, if a big project must be completed in a short timeframe, you’re likely to need staffing help. Consequently, a well-defined project plan is a prerequisite for budgeting in project management.
An ideal approach is to build out a work breakdown structure (WBS) for the project. The work breakdown structure allows you to capture all work involved in delivering a project at a detailed level. From there, it becomes much easier to assess the resource requirements for budgeting.
Step 2: Define resources
After you understand what a project entails, you can begin assembling the pieces of the budget. This means determining the resources required to complete a project.
What I’ve found in launching software products for various companies is that many project budgets encompass the same four ingredients with a fifth for miscellaneous items based on the nature of the project. I’ve broken down these factors for easy consideration here.
- Staffing: The foremost and most expensive cost is staffing. Does your project require additional team members? If so, how many and for how long? If the new staff will be paid on an hourly basis, the length of time should be in hours.
- Equipment: Equipment can take the form of machinery like an excavator for a construction project, or it can be the addition of tools like project management software. What equipment is required for your project? Capture this in your list of budget items.
- Sales and marketing: The nature of your project could involve sales and marketing costs. For example, when launching a new product, an advertising budget becomes a necessity. Some projects may not involve sales or marketing costs, but if they do, be sure to factor in expenses like sales commissions.
- Training: When a project is undertaken, usually some degree of organizational change management is introduced. Changes require training. The more extensive the change, the greater the training investment.
- Miscellaneous items: Another set of project cost considerations is dependent on your particular project needs. If you must travel for the project, then travel expenses must be part of the budget. If outside companies are engaged, their fees must be accounted for.
List all the people and items that you’ll need to successfully complete the project within deadlines. Align the resources required for the project with what you already have available today. If there’s a gap, this represents the scope of items requiring additional expenditures. From there, you can determine the budget itself.
Step 3: Assign amounts
Now that you know a project’s resource needs, it’s time to assign amounts. Go down the list of resources and begin evaluating costs for each.
Determining dollar amounts can be hard; that’s where research comes into play. Investigate historical budgets for similar projects in the past. Perform research online or talk to team members who have insight into the various items and related costs for the project.
For some resources, it’s necessary to model out costs. This is particularly true for staffing, where employee salaries vary from person to person and time is a factor.
Consequently, it’s effective to create a model in project management software or a spreadsheet to estimate staffing costs across the timeframe of the project using an average salary or industry norms for the positions.
Step 4: Build your budget
Once you’ve gone down the list of resources required for the project and assigned amounts, you’ll have your estimates. Remember to include a contingency fund as part of your budget.
Next, compile these estimates in your project management software or whatever tool your company uses for this purpose. If you’re using a spreadsheet or other free-form tool, it’s helpful to group related items together.
For example, all the training-related line items, like printing costs for training materials, should be together under a training bucket.
As part of building your budget, note any assumptions that went into the figures. This is important because once a project begins, some of the assumptions may hold true and others will not, resulting in actual project spend diverging from the budget.
By capturing the assumptions, you’ll understand why the budget didn’t reflect reality.
In addition, include a timeline if the budget spans a significant period of time — usually more than a month. This allows any recurring costs to be clearly identified in the budget. It also helps you identify the timing for when certain costs will arise.
Finally, review the budget with other project teammates to get feedback. Another set of eyes on the budget can identify missing items and confirm the accuracy of amounts. This also helps you avoid budget mistakes right before seeking approvals.
Step 5: Obtain approvals and implement
When you present your project budget to stakeholders or other business leaders who must approve it, be prepared to justify the items and amounts. This is when you’ll want to highlight key assumptions and other rationale, such as the staffing model.
Once the budget is approved, it’s among the project manager’s responsibilities to oversee it. It’s a good idea to use project management software to track costs. As the project management triangle dictates, if teammates start to fall behind on deliverables or unexpected delays arise, costs will be affected.
You need to have visibility into your current costs so you can compensate or request an increased budget with a valid rationale and game plan for how to get costs under control.
importance of project budget
- Budgeting is an essential part of getting a project approved and secure project funding.
- Well-planned budgets become the foundation for project cost control.
- Project budgets have direct relation with the financial viability of an organization.
Project budget management is therefore a key skill that project managers need to be equipped with. It consists of steps that are designed to help the project manager manage the project effectively because if a project has got a well-defined budget as stated above then the scope, objectives, and goals of the project will also be well defined and clear for the project manager.
Some of the steps in creating a simple project budget are as follows.
- Budget estimate: This step requires creating a budget using the income and expenditure data available from all the cost centers or departments. Costs that are not available will have to be estimated using forecasting techniques discussed below.
- Milestones, tasks, phase: To make the project budget as simple as possible it is important to break it down into separate tasks, milestones, or phases as applicable. Breaking down the project into manageable milestones helps prioritize and focus on the most important task, thereby increasing the chances of remaining within the budgeted limits.
- Add the estimates: Once the cost estimation is done and the project divided into tasks or phases, all of the estimates relating to different tasks and phases should be summed up to arrive at the final figure for the budget.
- Add contingency expenditure: At the time of estimating the budget, the complete scope of the project isn’t usually clear, and therefore it is better to allocate some amount for contingency expenditure. It is a norm to keep this figure at least 10% of the total budget.
How to estimate a project budget?
A number of forecasting techniques can be used to estimate a budget. Some of the techniques have been briefly discussed below.
The bottom-up estimation is the most commonly used method for creating project budgets. It simply requires summing up all of the costs allocated to the different activities in the project.
The sum of all the costs is the total project cost. Bottom-up estimation is particularly useful when every minute aspect of the project is known.
Since this technique accounts for every bit and aspect of the project, it takes a considerable amount of time to draw up a budget using the bottom-up estimation.
It is important to understand that budgeting is a continuous process, budgets grow and need to be updated as the project continues, and usually, as the project moves into its later stages and becomes more defined and the goals become clearer, the budget too becomes much more detailed.
Therefore there is a need to continually adjust the budget as the scope becomes clearer.
As the name suggests, this approach is the exact opposite of the first technique. The top-down estimation approach takes the sum total or the final budgeted figure and then breaks it up and allocates it to all the different activities, tasks, and phases of the project.
Top down approach is useful at the consideration stage where there is a need to decide whether the project should be accepted or not, while keeping the budget as a limiting factor.
The drawback of this approach is that it leaves very little room for any change, the budget is very much set in stone with this approach, every project experiences an increase in scope and planned tasks as it proceeds and the top-down approach discourages frequent changes to the plan and revisions in the budget.
It is therefore ideal for projects of recurring nature where the nature and scope of the project are fully understood.
This approach is suitable for experienced project managers who have a good idea of what the nature and scope of a project is and can therefore quickly draw up a budget based on similar past experiences.
An experienced project manager can use past data and experience to estimate the cost of a similar project, for instance, if a project manager has worked on a project to construct a mile-long bridge, then estimating a budget for a two-mile-long bridge under similar conditions won’t be too difficult.
The drawback of this technique is that it is only useful for projects for which a precedent exists, new and unique projects cannot effectively use this approach, similarly inexperienced project managers may find it difficult to apply this technique.
Furthermore, analogous estimation is not a very accurate technique because it relies on drawing parallels between similar projects and there are many aspects of costs that change over a period due to inflation, wage rise, etc.
This can be considered as an improvement upon the analogous approach. The parametric approach focuses on gathering data points from similar projects and then applying them on the project at hand.
For instance, a project manager can use the material cost and labor cost from an ongoing project, training cost estimates from a past project, and capital expenditure estimates from yet another project with similar outlay and activities.
The objective of parametric estimation is to make the analogous estimation technique more accurate with the inclusion of data sets that suit the current project from many different projects, in order to increase the overall relevance of costs.
It uses statistics, historical records and variables to create a budget quickly compared to a bottom up approach but similar in accuracy.
The drawback is that finding similar and relevant data sets may be difficult and time-consuming in and of itself and this technique too only applies to projects for which similar projects already exist.
The three-point approach is a scenario-based approach that includes the best, worst, and most likely scenarios and takes their weighted average. This approach minimizes the risk of exceeding the budget and therefore allows project managers to deliver the project within the budgeted estimates. Perhaps the only drawback of this approach is that it is a time-consuming approach.
Budgeting in project management, therefore, can be considered as a key activity that gives the project its direction, a good project budget can not only help complete the project efficiently but it can also make things much easier for the project manager, thereby allowing them to focus on other core activities of the project.
software project budget example
Best budgeting app overall
Mint is one of the most popular budgeting apps and for good reason. It is free to use, something rare among the best budgeting apps, and you get financial budgeting shared by 24 million users.
The app allows you to create a personalized budget and will then monitor your spending. It studies your spending habits and advises how to increase your savings. It will also check your subscriptions to ensure that you are not paying for services you do not need. With MintSights, you can set goals to reach financial milestones and build a stronger financial foundation. Once you connect your accounts, you can easily navigate between outstanding account balances, your monthly expenses versus spending, and even access your free credit score. Mint is compatible with not just banking accounts, but also your credit cards, loans, and investments. You can even file your IRS taxes and receive your refund through the app’s integrated TurboTax services.
Best budgeting app with digital envelopes
Cost: There is a free version with ads, or you can upgrade to an ad-free plan for $7 per month or $60 per year.
Goodbudget is a budgeting app that helps you create and stick to a budget. There is available debt tracking to keep you motivated and on track. It also helps with money management so you know exactly where your funds are and how they are performing. You will have to subscribe to Goodbudget, but once you do, you will have wide access to the app through both the web and multiple phones. This means that it is easy to share your account with others, like a spouse or family member. It helps you stay connected financially even if you are physically apart, helping to prevent miscommunications and financial mishaps. All transactions are synced to the cloud so you never have to worry about certain financial transactions going missing. Review pie charts and reports to track your spending, with generated reports to show your finances in greater detail. Digital envelopes help you categorize your finances into available funds with each envelope assigned to certain expenses. It is a visual way to improve your finances through the help of virtual tools.
Best budgeting app for investors
Cost: Personal Capital is free to use.
More than 2.8 million people utilize Personal Capital, and it is a portfolio tracker specifically designed to help with your investments, offering a unique digital approach to your personal finance. The app works with several different types of accounts, including your normal banking accounts, as well as investments, stocks, and retirement funds. The exclusive Retirement Planner tool helps you view your 401K, IRAs, and also your debt so you can have a complete, well-rounded portrait of your finances at the click of a button. The Cash Flow graph stacks your income versus your expenses for an overall financial snapshot that is easy to understand, plus there is an Investment Checkup tool that checks your investments, looking for ways to minimize risk while maximizing rewards. The Retirement Planner is an excellent option when you want to create and manage your retirement. You also have the option to join Personal Capital as an investment client so you can receive direct support from its financial advisors.
Best budgeting app for overspenders
Cost: There are three subscription plans, in addition to a basic plan with limited features for free.
|Type of plan||Cost|
|Lifetime One-Time Purchase||$79.99|
PocketGuard takes a different approach to budgeting, utilizing smart algorithms to manage and track your spending. It also monitors your bills, helping to ensure that you do not miss a payment and risk falling further into debt. There is a bill tracker and organizer available as soon as you link your bank accounts. Any subscriptions you have will be automatically flagged and built into your monthly budget. With the IN MY POCKET feature, the app will automatically calculate your monthly expenses and then advise you on what is left over to spend. It also can help you negotiate better interest rates on your existing accounts, helping you save those extra dollars. It is easy to identify what disposable income you have to spend when the app does all the calculating and reporting for you. You do not have to pay to use PocketGuard, although you will need to subscribe if you want to access all of the best.
In order to successfully create a budget for your business, you first need to understand what a budget is and how to use it in order to achieve success. Next, you must set a goal for your business and make sure that your budget is realistic. Finally, you should follow through with your budget by making sure that your business is achieving its goals.