Project Budget: What is it, How to Create and Benefits
A project budget entails a lot more than just managing and handling money, even if that is its main purpose.
By using a project budget, especially in project management, you’re structuring a plan, or a guide, to be used all throughout the life cycle of the project. From its ideation, creation, and execution to delivery, it’s one of the most important tools to ensure a project’s success.
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We’ll explore the best way to design a budget in project management and what can’t be forgotten in the process.
What is a project budget?
A project budget is a plan that includes every detail on how much money will be spent on a project, its needs and resources, for what, by whom, and when.
Creating a budget entails constant monitoring of every amount of money spent or invested in a project. This way, the probability of running out of resources (financial and others that depend on money), will be quite small.
Budgeting issues are extremely common, but they can be avoided or at least reduced with careful planning.
This may sound obvious, but one of the most important keys to success is to create the project budget before the work starts.
Like in many other steps of the project management list of tasks, a preventative attitude is better than a reactive one.
This means that working on budgeting in advance helps control costs and anticipate needs.
Having the scope of the budget ready to present to the project’s stakeholders is also a major benefit.
A detailed spending plan helps the people with the money to understand how the costs they’ll support will contribute to your objectives.
As the work progresses, the project budget serves as a baseline to compare actual spending to budgeted spending and mitigate extra costs.
What should a project budget include?
Project management budgeting must include:
- labor costs;
- material procurement costs;
- resources cost per quantity;
- expenses (food, travel, supplies);
- a fund for emergencies;
- cash flows.
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Avoid over or under servicing your clients – get immediate alerts when you’re close to exceeding the budget
Why do you need a project budget?
- It’s a key project management skill, you need to know how to create and manage a budget
- Helps to ensure the project is completed within the constraints of the available financial resources;
- Estimates the costs of a project’s activities and resources;
- Facilitates project cost tracking;
- Allows comparing estimated costs and real costs;
- Helps to identify and manage risk associated with the project’s finance;
- Helps align the project goals and objectives with the organizational goals and objectives;
- Facilitates the communication between the project manager, team members, and stakeholders;
- Helps to make better decisions;
- Allows better monitoring and control of the project’s financial performance.
The need for a project budget arises from having to evaluate the success rate of said project.
The stakeholders will want to be informed of the benefits of the completed project vs its total costs. It’ll also determine the role of the project in the organization’s or company’s growth strategies.
For instance, too much spending on one particular project may affect the availability of funds for other future projects.
An organization needs to determine if the project’s benefits are worth its costs and if it is sustainable to keep investing in them.
A project budget also helps an organization/company establish priorities. Many organizations need to decide between two or more projects. Who’s going to receive the necessary funds? A well-calculated project budget is fundamental to helping the decision-makers decide if one particular project would be a good investment.
The budget will also provide a comprehensive view of the project’s risks since it’s good to anticipate some of them during this phase of preparing for a project.
TIP: Find out what is a time budget plan and how it is important for your project.
How to create a project budget
These are the steps you should be taking when creating a project budget. The budgeting process should follow these steps, to stay as close to the total costs as possible.
1. Set the project’s goals and evaluate its limits and possibilities
What’s the final goal of the project? What do the project manager and their team want to achieve by setting the project in motion? The project’s goals are the driving force and a good place to start organizing a budget.
Many different strategies can help set goals, such as the SMART methodology, that help define clear goals. Once these are set, it’s important to evaluate the limits and possibilities of the project.
Consider the deadlines and milestones you’re working towards and take stock of your resources. Time limitations are very important to consider.
Does your team have the necessary skills for the project? Do you need to outsource some work? Can you even consider doing that? It’s useful to be aware of any limitations, just in case you need adjustments.
Stay focused on the project’s goals, to avoid spending on areas you don’t even need to address.
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Read also: What is time estimation and why is it important for project management?
2. Structure the work into milestones, deliverables, or tasks
Taking into consideration the nuances and scope of your project, break the work into smaller pieces, whether they’re project milestones, certain deliverables, or tasks. Then breaks those down too, so that you can estimate possible costs.
Breaking down tasks is extremely helpful in preventing unnecessary spending.
3. Estimate the costs of each item
After listing every item and, if applicable, their sub-dependencies, it’s important to list resources and then estimate the costs.
Be as specific as possible while doing this list of resources, for each item can require more than just staff or equipment.
Aside from the team’s salaries, you may need to hire freelance workers, rent physical spaces, buy more technological equipment or software, have specific training, etc. Think about everyday expenses, such as food and travel.
Each of these needs should have an estimated cost, as close to reality as possible.
Use previous budgets for comparison purposes, set a final goal and work backward, build different scenarios… There are many strategies you can use in estimating costs.
4. Make sure you have an emergency fund
It’s better to be safe than sorry. And even though it’s not possible to be 100% correct about the final estimate because there are a lot of moving parts and unknown factors. So, adding an emergency fund is the best way to make sure that the project doesn’t go over budget.
Contingency reserves give your budget extra padding when the need arises. The typical recommendation is to set aside 5-10% of your total budget for this kind of situation.
5. Build the budget
Next, it’s time to create the budget document. If you’re not using specific project management software, a budget template, Google Sheets or Microsoft Excel do the trick.
When building your budget, write in as many details as possible. Line every item and sub-item and each expected cost.
It would be great if you could add the person responsible for each item as well, and a small description that included the expected date that the funds will be spent.
Build a table that allows you to track actual costs vs. budgeted costs once your project kicks off.
Having every detail registered is extremely important. It’ll help answer questions from stakeholders and investors, it’ll help future project managers and it’ll be the best way to make sure you’re sticking to the budget.
TIP: Read our post about “Google Sheets time tracking” and learn how to budget your time with this tool.
Free eBook: The Project Manager’s Handbook on Time Tracking
Get your step-by-step guide to master time tracking as a Project Manager
6. Get approval
With everything ready, it’s time to share it with stakeholders and investors. A detailed plan is more likely to be approved more quickly. Make sure to provide a crystal clear picture.
7. Monitor the budget
The hardest part is here: sticking to the planned budget.
Plan how often you’ll keep tabs on the actual costs vs. budgeted costs. This way you can mitigate potential problems and hopefully avoid going over budget.
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Additional: Get to know some of the best project management tools that help you monitor a project’s budget.
6 Tips to create a good project budget
Building your first-ever budget is not easy, but it only takes one time to grasp what’s needed. Here are a few tips and tricks to make the job easier:
1. Start by determining the core costs
The things that are impossible to escape and that cannot be just improvised.
These are the absolute must-have costs of the project and working with them in mind right from the start will provide a clearer picture of what the rest of the budget might look like.
2. Learn from other professionals and projects
If the possibility exists, find past projects with similarities to yours and refer to them as an example. With this extra help, it’s easier to figure out how much money goes into each area and/or task.
3. Keep the team informed
Inform and communicate the evolution of the budget forecast. People need to know what’s expected of them to stay within budget.
They’re an extra help to the project manager in terms of monitoring costs as the project develops.
TIP: Project reports are crucial to keep your team informed.
4. Keep reviewing and revisiting the proposed budget
The real-time project changes that are bound to happen must be tracked and documented.
You can review and revisit the budget at least weekly to warn if your estimates need an update. Remember that estimates are just that – estimates, and can easily change.
5. Monitor the resources
Monitor everything you can such as salaries and contractors’ payments, to make sure everyone is reaching their goals and no money is being “wasted”.
As a project manager, it’s best to promote productivity habits, such as using time tracking tools such as Timeular, to make sure that the work hours are being well used. Promote a healthy and balanced work environment.
Get to know the best time tracking apps for contractors.
6. Keep an honest conversation with the stakeholders
These are the main players supporting the project and maintaining open and honest communication is a smart move in case you need to reinforce the budget.
Get to know everything you need to lead a meeting.
Who approves the project budget?
The final project budget is usually approved by the stakeholders. However, if the project manager is not directly involved in building the budget it might still have to go through them. However, the final decision usually comes from the stakeholders.
Remember that whoever approves the budget will have questions about it. Make sure you’re prepared!
Conclusion
A well-planned budget helps the project manager and the project team through the entire project lifecycle, from planning to approval and execution. The skill of budgeting is not easy to master but is key to ensuring the project team has the resources they need to conquer key goals and deliver quality results.
Remember that when you are proactive, and organized and set concrete goals, it’ll be significantly easier to get the budget approved, even if it requires very expensive projects. By demonstrating skill and respect for the relationship between time and money, you will have the confidence that your budget suggestions will be considered seriously by the stakeholders who must approve them.
If you have questions about project management, it might be a good idea to enroll in one of the best online project management courses.
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