Every project involves costs. Funding is essential to start the project and set all resources in motion. The larger and more complex tasks are, the higher their costs will be, not only in terms of money but in time too. Every project requires a project budget in all companies.

In this step-by-step guide, you will get a notion of the project budget functions, its challenges, what you need before creating a project budget, and how to estimate costs correctly.

What is a Project Budget

A project budget can easily set how much your project will cost. You can break down your items and calculate their estimated cost to improve control over the final budget. 

The project budget will include labor costs, materials costs, research expenses, capital expenditures, and many other miscellaneous fees that you may need (like travel expenses). 

But it doesn’t mean it will stay that way once it is set up. Costs may change over time, and any situation can happen and change your original budget. So, you need to review it regularly and keep everything in check. 

The Importance of a Project Budget

One of the many advantages of making a project budget is securing funding. A clear budget report will tell stakeholders how much money and when it is needed to gear up your project. 

It provides control over the cost of the project. Having accurate estimates measure against the approved budget and see how much you’ve already spent. It will make you aware of how everything is progressing and if any changes need to be made to the project plan.

Also, a project budget directly affects the company’s finances. A well-defined project plan will increase operating margin and improve overall success. 

Main Challenges in Making Project Budgets

While planning your project budget, many considerations need to be addressed before you dive into assembling the budget itself. 

Estimating Project Costs

A budget in project management comprises many types of expenses. As we stated at the beginning, you will have to consider direct and indirect costs, capital expenditures, costs related to project deliverables, and any additional expenses that may occur.

Remember that the initial budgeted costs will never end up the same. The project expenses will fluctuate as it goes on. 

So make your best effort to capture the resource needs and be as realistic as possible with cost estimates without being too conservative in your numbers. 

Budget Contingency Reserves

Another big challenge for project management budget planning is not knowing what could happen in the future. Even with a detailed estimate of cost and resources, there will be delays or changes, and your project budget may need to be adjusted.

Therefore, it’s a good idea to have prepared emergency funds for the unexpected. A standard practice is to set it up between 5 and 10% of the total budget for contingency and management reserves. 

Tracking Your Budget

Project budget management warrants the project stays in line with the budget. You’ll want to track its activities and where the money is going.

You can quickly catch if costs start to exceed estimates by regularly monitoring the project budget. This will allow you to make adjustments on time and identify additional budget needs with enough time before work must halt. 

Getting Ready Before Project Budgeting

Before creating a project budget, you must prepare everything for the project and work around costs. 

Next, we will see what you need in the project management department before you dive directly into the project budgeting process.

Set Your New Project Goals

Setting up your project objectives is the best place to start. It will help you understand where the work is headed and act as a guide for your entire project.

An objective that is clear and easy to define, measurable, and realistic is your best option to use as a benchmark of success once your project is finished.

Define the Project Scope

Once your objectives are set up, you can determine the scope of work that you’ll need. Your project scope sets boundaries, such as what work you will do (or not) and what deadlines and deliverables you are working towards. But when defining your project scope, you should have considerations.

Before determining the specific deliverables you want to target, take stock of your available resources. You may adjust your deliverables accordingly if you are at a hard budget cap or have limited project team bandwidth. It’s helpful to be aware before diving into the details of deliverables and resources. 

There are also time restrictions. A tight project schedule can influence the cost of resources. For example, you may need to hire additional people if you fall behind schedule. 

At last, you may find it helpful to identify what you’re not trying to achieve, so you can avoid scope creep and spending more than you need. 

Categorize Your Project Deliverables

Try to list all the deliverables within your project scope and break them down into categories.

This method helps you include any hidden project expenses when you create your budget. You can also create a work breakdown structure (WBS). With this visual tool (which works similarly to a flowchart), you will be able to break down work into multiple levels, starting with your main objective at the top into different deliverables and sub-categories below.

List the Resources Required for the Project

It’s time to assign the resources required for each item. It would be useful if you were as specific as possible, and anything can be considered a resource (staff or equipment). It may also include any other kind of costs, such as training or physical space to work.

Some of the most common project cost categories include:

• Team members. Make a note of whether they are salaried in-house staff or if you need to hire additional freelancers or hourly contractors.
• Training. When a project is undertaken, some degree of organizational change management is usually introduced. This will require training for project teams. The more extensive your change would be, the greater the training investment in your team members. 
• Equipment. It can take the form of machinery or additional tools like project management software. Capture this in the list of your budget items.
• Marketing. The nature of your project could presume sales and marketing costs. As an example, if you are launching a new product, an advertising budget will become necessary. 
• Miscellaneous items. Another set of project cost deliberation is based on your particular project needs. This may cover some additional expenses like travel or research. If outside companies are engaged, you must take account of their payments.

List all the items and people you’ll need to complete the project within the deadlines successfully. Align the resources required and fill any gap that you may encounter.

Time to Create a Project Budget Plan!

Once you know the project’s resource needs, it’s time to assign amounts. To get along with the project budget creation process, you must keep track of the next several steps. 

Set the Estimated Costs

You would need to go down the list of resources. For some of these resources, it’s necessary to figure out costs. This is especially true for staffing, where employee salaries vary, and you need to consider time as another factor. 

For these cases, it’s practical to create a model in project management software or even a spreadsheet program (which can be easily made on Excel) to estimate staffing costs across the project timeframe using an average salary or industry norms of the position.

There are also a few methods to help you make the most accurate estimates possible, which we’ll see later in this article.

Use Historical Data and Reference Lessons Learned

Probably your project is likely not the first to try to accomplish a specific objective. Looking back at similar projects and their budgets is a good way to get a headstart on building your budget. Previous projects provide valuable data as they’re a real-life record of where expenses stayed on (or off) track.

You can learn from their successes and failures to further elaborate on historical data. It provides a clear path toward a precise estimate and accurate budget. 

You can learn about how they responded to changes and kept their budget under control.

Prepare a Contingency Fund

Contingency reserves give your extra budget padding when plans change. A typical recommendation is to set aside 5 to 10% of your total amount for contingencies. 

Budgeting is an estimation process, and you should always have something as a reserve. And suppose you accurately predicted your budget and ended up not using that extra money. In that case, you can bolster the company's bottom line with the leftover funds. 

Build Your Budget

At this point, you have allocated all the project requirements, resources, and estimated costs. Now you can properly create a project budget document. 

This is made with some key components you need to address:

• Line items for each deliverable, sub-deliverable, and any required resource. Add their expected cost.
• Set a timeline of when you’ll need each resource and when you expect to spend funds. 
• Have clear documentation of which part of the company budget you’ll pull from for each of the line items. For example, you may use the marketing department budget for advertising campaigns and the IT department budget for computer upgrades.
• A total of spending for your entire project. Include individual totals for each department budget you will be using.
• Add a place to track actual costs against budgeted ones once your project starts. 

Selecting the right project budgeting tool is essential, too. Make sure the project management software you choose can automate some functionalities, like automatically converting into dollar amounts, so you don’t have to manually recalculate every time you adjust a line item. 

Also, ensure that your chosen tool lets you easily share and update your budget in real-time so that all team members can access the most current version. 

There are many options in the market for robust project management software, but you can rely on spreadsheets software like Excel.

Confirm Accuracy and Leverage Your Experts

You can rely on mentors, other project managers, or experts in the field to help create your project budget. Reaching out to those who have created budgets can help you stay on track and avoid unnecessary pitfalls. 

Once you have your budget, you want to look at it and ensure your figures are accurate. You can seek those experts and other project team members to check the budget and make sure that everything is correct.

Your project budget is the baseline by which you’ll measure and reach your project’s success. It is a tool to gauge the variance along the way. 

Monitor the Project Budget Regularly

Plan how often you’ll keep tabs on actual costs against budgeted costs so that you can mitigate potential issues. You can also decide up-front what you’ll do if you go over budget or under budget. 

Present It to Your Project Stakeholders

When you present your project budget to business leaders, key stakeholders, or anyone who must approve it, be ready to justify the items and amounts. Once it is approved, it is up to the project manager responsibilities to oversee it. 

You will need to have visibility into your current project and its budget so you can compensate for any unexpected costs that may arise or request an increase in funding with a rational game plan for how to get costs under control. 

Techniques to Make Correct Cost Estimates

As promised, we’ll take a look at some methods to make a reasonable estimate budget. You don’t need to pick one and stick with it. You can mix them up on your way. 

Bottom-up Estimation

A bottom-up estimate rates the individual parts of the project plan and totalizes them. 

It’s one of the best and foolproof ways to prepare a project budget. It anticipates individual parts of the project, such as milestones, phases, or project tasks, and totals them to get the project cost. 

This method can be tried if you’re at the point of creating a statement of work. If you’re sure you know everything about the project, consider bottom-up estimating. 

Top-down Estimation

Top-down estimation is the opposite of the bottom-up approach as it figures out the total and splits it into all the tasks or milestones. It is typically used when you have a fixed project price. 

This approach's main disadvantage is a loose estimation of the project’s beginning. It is hard to predict with accuracy and precision before you understand the scope of work. For example, it can cause misalignment between the selling and the project teams. 

Analogous Estimation

Using analogous estimation, you will have to analyze the data of similar projects before you decide on the cost. 

You would rely on the budget data and best practices from your previous projects to determine how much the current one could cost the client.

Analogous estimating is not as precise as the previous examples, but its advantages rely on being quick, especially when there are limited data about the project.

Parametric Estimation

Parametric estimation is more accurate than our previous technique. It uses data and project variables to suggest the total. It takes these points from particular parts of specific projects and applies them to the current project, so you make more decisions based on data.

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

But the problem, as it happens with analogous estimation, it’s that it is hard to find useful data points, even more with digital projects.

Three-point Estimation

Three-point estimation is one of the most sensible and pragmatic techniques. It considers a weighted average based on the best, the worst, and most likely case budget scenarios. It encourages you to think from multiple perspectives.

Its main advantage is that you can reduce the risk of going over budget and eventually deliver on expectations. It will take longer than the rest of the methods, but it is worth it. 

How to Make a Project Budget in Excel

Let’s say you don’t have much time to familiarize yourself with any other software to address your project budget. That’s no problem, as you can make your own with any spreadsheet program, especially Microsoft Excel. 

If you need this software, it comes with the whole Office package, and you can get a Microsoft Office CD key for a lower price. Then, you can get any project management budget template of your choice and needs. There are many on the internet, and you just need to download them.

Project Budget Template by ProjectManager

You can download it for free on ProjectManager.

Simple Project Budget Template by Smartsheet

Download it for free on Smartsheet.

Conclusion

A substantial project budget is a cornerstone for project success. If you can’t control project costs, they will crumble fast, and any progress you have already made will be in vain. 

It takes some time, and most of them are in preparation for the actual budget report. Once you have the data ready, it becomes pretty simple. You can even rely on any project budget template to facilitate your job or any other project budget example that you may find. But you need to do a project budget if you want your business to grow.