How to create (and stick to) a project budget

It’s hardly a shock to hear that budget management is a major part of being a project manager.  It’s one-third of the ‘triple constraint‘ triangle – the bedrock of the PM’s day-to-day activities. What may be surprising, however, is just how challenging it can be to set a project budget.

Many factors can contribute to difficulty in budgeting, including scope creep, unexpected costs, and unrealistic expectations. But with careful planning and a few best practices, you can set a budget to accommodate these ups and downs and help your project stay on track. In this article, we’ll take a closer look at budgeting as a process and offer some tips on how to get it right. 

What is a project budget?

A project budget estimates the total cost of all the resources needed to complete a project. This includes direct and indirect costs, such as materials, labor, overhead, and other expenses. The purpose of a project budget is to help you control spending and keep your project on track.

Why is it important to set a project budget?

There are several reasons why setting a project budget is important. 

First, it gives you a clear understanding of how much money you’ve got to work with. This helps you make informed decisions about where to allocate resources.

Second, it helps you track progress and identify potential problems early on. If actual costs start to exceed the budget, you’ll know you’ll need to take corrective action. If you’re running under, then congrats! You might want to think about upping your work or widening the project. Or you could just carry on as you are and save money for your next project. A budget can help you make these informed decisions. 

Finally, a well-managed budget can help you manage expectations. If all stakeholders are aware of the financial limitations of the project from the offset, they won’t expect more than you can deliver. Or they may decide to up your budget. 

To summarize, a project budget helps you achieve the following:

• Establish a baseline for measuring progress
• Track actual costs against the budget
• Detect variances and take corrective action
• Communicate financial limitations to stakeholders
• Make informed decisions about resource allocation
• Gain insight into future projects
• Operate more efficiently
• Help you secure funding
• Help managers keep track of the project’s progress

What does a project budget include?

A project budget includes all of the costs associated with completing a project. This includes both direct and indirect costs. 

Direct costs can be easily traced to the project, such as materials, labor, and travel expenses. Indirect costs are more difficult to attribute to the project but still need to be considered, such as overheads, facilities, and administrative expenses.

Here are some of the key costs you’ll likely need to include in your budget:

• Materials: This can include anything from office supplies to raw materials needed for manufacturing.
• Labor: This includes the costs of all workers needed to complete the project, including wages, benefits, and HR.
• Travel: If your project requires travel, you’ll need to factor in the cost of transportation, lodging, and meals.
• Overhead: Overhead costs can’t be easily attributed to a specific project. This can include rent, utilities, insurance, and administrative expenses.
• Training: You’ll need to factor in the cost of courses, materials, and travel, as well as the downtime that comes from taking people away from their regular tasks. 
• Research and consultants: If your project requires research or outside consultants, you’ll need to factor in the cost of their services and expenses. 

Tips for setting a project budget

Now that we’ve covered the basics, let’s take a look at some tips for setting a project budget:

1. Define the scope of your project

Defining your scope means being clear about what you want and can achieve and what deliverables your clients/customers expect. 

Trying to do too much with too little will only lead to frustration, overspending, or disappointed clients (or all three) – so it’s important to be realistic about what you can do with your budget. 

2. Set timelines, tasks, and deadlines

Once you’ve agreed on the overall scope, it’s time to hold a magnifying glass to the finer details. We’re talking deadlines, tasks, deliverables, and risks (which you can work out with a risk register).

This will give you a better understanding of the resources you’ll need and the costs associated with each task, as well as the project as a whole. Collaborating with your team and stakeholders here is a must since they’ll be able to share valuable insight on the specifics.

Remember that at this stage, you’re just gathering all the bits you’ll need to determine costs – you’re not estimating just yet. After you’ve worked through your timelines and tasks, you may need to go back to stage 1 and refine your project scope. If not, move on to stage 2.

3. Estimate your budget

Now it’s time to start crunching some numbers. The goal here is to get as close to an accurate estimate as possible so that you don’t find yourself coming up short later.

There are many different methods for estimating costs. Some project managers prefer the bottom-up approach, where costs are estimated for each individual task and then added up to get the total project cost. Others prefer a top-down approach, where an overall project cost is estimated and then broken down into individual tasks.

The bottom-up approach involves more work upfront, but it’s generally more accurate since you’re working with specific tasks and costs. The top-down approach is faster and may be useful if you’re working with a tight deadline, but it can lead to problems later on if your estimate was too high or low.

Beyond the two approaches already discussed, there are these three other methods of estimation: 

• Analogous estimating: Use the cost from a similar project to estimate the cost of your current project. For example, if you’re building a house and you’ve built a similar one before, you can use that experience to estimate the likely spending of your current project.
• Parametric estimating: This approach uses mathematical formulas to estimate cost. For example, you might estimate the cost of painting a house by calculating the square footage of the house and then multiplying it by the cost per square foot. Or you might combine historic and statistical data, combined with other variables, to deliver accurate estimations.
• Three-point estimation: This approach uses three different estimates – best case, worst case, and most likely – to calculate the cost of your project. This is useful for projects with a lot of uncertainty since it gives you a range to work with rather than a single estimate. 

Once you’ve selected your approach, it’s time to start estimating the cost of each task.

Remember to include a contingency in your budget. A contingency fund is a buffer you can use to cover unexpected costs. It’s important to have this in place because even the best-laid plans can go off the rails, and when they do, it’s usually because of unforeseen costs. 

A good rule of thumb is to set aside 5-10% of your total budget for contingencies, depending on the specific project. For example, a construction project will likely have more unexpected costs than a marketing campaign, so you would want to set aside a larger contingency fund for the former. 

4. Create your budget document 

Now that you’ve estimated the cost of your project, it’s time to create your budget. This is a document that outlines all the costs associated with your project, as well as how you plan to spend the money.

Once you’ve listed everything, you start allocating money to each item. This is where you’ll need to decide how to spend your budget best. Don’t be afraid to ask for help if you need it! 

5. Allocate your budget

This is where you’ll decide how much of your total budget to allocate to each task (and associated team member), as well as to the project as a whole.

There are a few different ways to approach this.

You can allocate your budget based on the importance of each task. For example, you might allocate 50% of your budget to the most important task, 30% to the second most important task, and 20% to the third most important task. 

You can also allocate your budget based on the time required for each task. For example, you might allocate 40% of your budget to the task that will take the most time, 30% to the task that will take the second most time, and so on.

Ultimately, it’s up to you to decide how to allocate your budget. Just make sure you have a thoughtful plan for how you’ll spend the money.

• Include every deliverable, including its associated sub-deliverables and resources, plus the costs associated with each item.
• Note the person responsible for monitoring each element of the budget. For example,  if you’re working with an outside vendor, you’ll want to ensure that someone is responsible for keeping track of their invoices and expenditures.
• Include a place to track actual costs against estimated costs. This will help guide you as your project progresses. Check out our guide to setting project baselines for more tips.
• Note down where each part of the budget will come from, whether internal sources or external.

Top tip: as you go about estimating and allocating your budget, be sure to step back and reassess the big picture. It’s easy to get bogged down in the details, but it’s important to remember that your ultimate goal is to complete the project within the allotted budget. 

6. Get approval from your stakeholders

Now that you’ve created your budget, it’s time to get approval from your stakeholders. This is an important step in the budgeting process because it helps ensure everyone is on the same page about costs and associated work. 

To get approval from your stakeholders, you’ll need to present them with your budget. Make sure you explain your decisions and give them a chance to ask questions. Once you’ve answered all these, you should be able to get approval for your budget.

Top tip: don’t forget your internal stakeholders! These are the people within your organization who your project will impact. Make sure to involve them in the budgeting process and get their approval before moving forward.

7. Track your spending

Once you’ve allocated your budget, it’s time to start tracking your spending. You can use a spreadsheet for this or the gold standard – project management software, which does all the number crunching and tracking automatically. Whichever method you choose, make sure you’re updating it regularly to have an accurate picture of your spending.

8. Stay on track

Once you’ve created your budget and started tracking your spending, it’s important to stay on track. This means regularly reviewing your budget and ensuring you’re not overspending.

If you are overspending, it’s important to take action to correct it. This might mean cutting back on some of the costs associated with your project or finding a new funding source. Top tip: the Estimate at Completion (EAC) method can help you monitor your budget and spending and adjust accordingly.

By staying on track, you’ll ensure that your project stays within budget and that you don’t go over budget.

9. Create a budget change process

Things happen, and budgets come under strain – which means you might need to change your plans to keep the project on track. A process for this will help you ensure that the changes are correct and that the relevant stakeholders approve them.

So – how do you make a change management process?

The first step is to identify the reason for the change. This could be something like a change in the project’s scope or an increase in the price of materials.

Once you’ve identified the reason for the change, you need to calculate the impact on the budget. This will help you determine how much additional money you need and where to allocate it.

After you’ve calculated the impact of the change, you need to submit a request to the relevant stakeholders for approval. This request should include an explanation of the change and its impact on the budget.

Once the request is approved, you can implement the changes to the budget. Make sure to update your tracking methods to keep track of the new spending. And that’s it! 

10. Review and save your budget

Performance reviews are an essential part of learning and improving both as a person and as an organization. So don’t neglect this important task!

Reviewing and saving your budget will help you see how well you did and help you to learn for future projects. Pay attention to both the total amount spent and the individual line items. This will give you a good overview of where your money went and help you identify areas where you could have saved money.

Once you’ve reviewed your budget, be sure to save it so that you can reference it in the future. This will be handy if you’re ever working on a similar project.

Budgeting: best practices

When it comes to budgeting, there are a few best practices to keep in mind. 

1. Make sure you’re realistic about your costs: wowing the client with overpromising only goes so far when your project’s on the rocks, and you’re over budget. If you want to put a smile on their face, impress them with realistic budgeting and deliver on that. 

2. Track your spending carefully. “I didn’t realize” isn’t good enough for overspending, so track your progress carefully. This will help you catch any overspending early on and take corrective action.

3. Record your changes: If you need to make adjustments to your budget, make sure you have a process in place for doing so. This will make the process smoother and ensure you don’t leave anyone out. No one likes surprises, least of all stakeholders! 

4. Use project management software to help with budgeting. These tools make it easier to estimate and track work. They can also help you manage changes and notify everyone involved quickly. Because when it comes to budgeting, transparency is a must.