Budget overruns are every project manager’s nightmare. You must set a project budget from the very outset to keep that nightmare from becoming a reality. Budgeting helps you keep costs under control, meet deadlines, and produce high-quality deliverables.
This guide explains what a project budget is, why you need it, and what goes into making one.
Project Budget Explained
A project budget is a document that outlines how much you’ll spend, for what, and by when. The budget contains the combined costs of all activities, tasks, and milestones that project teams must complete.
Project managers create their project budgets during the initiating phase and monitor them until the project ends. A meticulously planned project budget is an excellent way to pitch your project to stakeholders and get the necessary funds. Providing stakeholders with a detailed spending plan helps them understand how the funds they give you will help achieve your objectives.
Having a budget that you can use to monitor your spending as the project progresses can help reduce the chances of running out of resources or going over budget—a common occurrence in many businesses. In fact, according to a Project Management Institute survey, only 62% of projects are completed within the original budget.
Additionally, you can use your project budget as a baseline to compare actual spending to budgeted spending. Should any extra costs arise, you’ll be able to identify and mitigate them.
What to Include in a Budget + Typical Project Costs
Your project budget should cover several cost categories relevant to your project. Here’s a closer look at the project costs you need to include in your budget:
- Labor cost: This includes salaries of full-time workers and wages for temporary workers, benefits, and payroll taxes
- Materials: All the equipment, software, and other supplies your team might need to perform the work.
- Transportation: Travel costs and other logistics.
- Professional services: Legal advice, consultants, market research firms, etc.
- Training: Courses, conferences, or facilitators for project-related skills and tools.
- Contingency reserves: Funds to cover miscellaneous expenses that may be missed in the actual budget. Contingency reserves help reduce risks of budget overruns and are usually 5-10% of the budget.
Why a Budget Is Important
A project budget is a powerful tool that could easily affect your project’s funding. It gives stakeholders a clear picture of how much money is needed and when it’s needed.
With a budget, you can keep an eye on how the team spends money and control it because you can clearly see how your actual cost stacks up to your estimated cost.
A proper budget will keep costs in check and help project teams to operate within available funds and resources. This helps increase the operating margin and improve overall project success.
Project budgets are also helpful in determining future project costs by providing a historical record of past project costs.
7 Steps for Creating and Managing a Project Budget
Creating a project budget may seem daunting, but these seven steps can help you build an effective project budget.
1. Outline your project objectives, tasks, and milestones
First, start by defining your objectives. Project objectives help you understand where your project is headed and exactly what your project intends to accomplish. Once you’ve established your goals, list the tasks, milestones, and activities your team will need to complete to achieve the objectives.
Compiling this list will help you determine everything that will have a cost attached to it.
2. Break deliverables into sub-dependencies
Next, list all your project deliverables and break them down into sub-dependencies. By breaking down deliverables into sub-dependencies, you can factor costs for every task instead of the objective as a whole. For example, instead of estimating costs for holding an event, you can breakdown the costs into venue hire, catering, service staff, etc.
3. Define required resources
List the resources required for each deliverable and sub-dependency. Be as specific as possible. Here, you can consider the cost categories we outlined above.
4. Estimate amounts
Now that you know what you want the project to achieve and all the required tasks and subtasks, you need to come up with the numbers. Here are three common budget estimating techniques you can use to estimate amounts for your task list:
- Analogous estimating: This method involves using a similar project to estimate costs. Remember to adjust the past budget to account for variables or differences in the current project. This technique is effective if you routinely do lots of similar projects.
- Parametric estimating: Similar to the analogous estimating technique, parametric estimating relies on data from past or similar projects to estimate the project’s overall cost. But instead of matching estimates for types of tasks, the parametric technique uses the relationship between variables to calculate the cost.
- 3-point estimating: This bottom-up estimating approach takes a weighted average of the best-case (optimistic), worst-case (pessimistic), and most likely budget for each task to produce the estimate.
5. Set aside a contingency reserve
You may budget meticulously, but it doesn’t mean things will always go as planned. The unexpected could happen, throwing the project budget off course. Having a contingency reserve in your budget will buffer you from the unexpected. Experts recommend setting aside 5-10% of your total budget for contingencies.
6. Finalize your budget
Once you have a clear project budget, run it through crucial project stakeholders to get their feedback and improve your budget where necessary. You also need to get your budget approved by the relevant stakeholders, such as senior management or project sponsors.
7. Monitor your project budget
The budgeting process continues long after your budget is approved. Continue monitoring your project budget regularly so that you’re able to anticipate problems like scope creep or overspending early on. That gives you enough time to course correct without disrupting project progress.
Budgeting Best Practices
Now that you know the steps to follow when putting together your next project budget let’s cover a few best practices you should implement to improve the process.
Keep the budget updated in real time
Don’t create a budget and store it away. Update it in real-time as you track project progress and spending. Doing so will help you identify new opportunities to save costs or handle unexpected expenses that may arise mid-project.
Account for project risks
Every project is prone to some amount of risk. So even with the best-laid budget, things can go awry due to factors that are out of your control. Equipment can malfunction, vendors can be unreliable, staff can quit midway, and supply chains can break down. But if you’ve accounted for such unforeseen issues in your budget, you’ll have better chances of finishing the project smoothly despite any hiccups.
Develop relevant KPIs
Establish key performance indicators (KPIs) to help ascertain how much has been spent on a project, the difference between the actual budget and what was planned, and so on.
Keep Your Project Budget on Track With Mission Control
As you can see, a project budget is a key tool for tracking and controlling your spending throughout the duration of a project. While it’s definitely possible to create a budget manually (hello spreadsheets and Excel formulas!), you may want to consider an easier option.
Project management software with budgeting features can help you create a more precise and hassle-free budget. The software makes your work easier and more efficient, especially if your projects involve tons of milestones and dependencies.
Mission Control has a dedicated budgeting feature—Project Financials—that not only allows you to set a budget but also offers a clear view of the project’s financial health. With this kind of visibility, you can better maintain project financial control.
You can quickly compare your actual expenditure to the planned budget to ensure that it doesn’t differ too much. Further, the tool generates cost reports for deeper analysis that you can use to estimate costs for future projects.
Ready to learn more?
Request a demo to see how Mission Control can help you create and maintain a budget for more profitable projects.
