What is a project budget?

A project budget estimates the total cost of a project throughout each of its phases. Because every project has expenses, your project manager is accountable for sticking to a budget. If they under-call it, they risk missing milestones, lacking resources, and asking for more money. If they over-call it, stakeholders may decline the project altogether. Project budget management is crucial for setting expenditure expectations, gaining approval, ensuring funds are available when necessary, and measuring performance against actual costs. As your project progresses, your budget helps you answer questions, achieve goals, and stay on track.

A project budget is an evergreen document you can continuously monitor, review, and update throughout a project’s lifecycle. It typically includes all costs associated with the project.

• Labour costs: Employee wages, payroll taxes, benefits, and overhead.
• Material procurement costs: All the goods, services, supplies, and equipment from external sources necessary for project success.

You can break each of these categories down into two broader categories.

• Fixed costs: Set costs that won’t change. For example, a firm quote from a supplier covers the cost of materials for the project.
• Variable costs: Costs that require consistent monitoring as they change according to activity—for example, an hourly subcontractor working overtime.

A project budget helps you identify the costs of each activity or task and assign them a timeline. Attention to detail is crucial for tracking project performance. For example, if you allocate 25 hours to the design stage for one month, you can calculate your weekly budget and spot variances before they become problematic.

What is the purpose of a project budget?

A project budget aims to estimate a project’s cost from start to finish accurately. The project budgeting process includes:

• Budget planning: Estimating project costs and creating a budget based on the estimate.
• Budget tracking: Monitoring expenses during project execution.
• Project budget management: Developing guidelines and controlling procedures to ensure costs don’t exceed your project’s budget and adjusting where necessary. You also have visibility into whether your project will require extra resources with enough time to secure funding without interrupting progress as you wait for additional approvals.

The benefits of efficient project budgeting

A detailed spending plan helps stakeholders understand how costs contribute to your goals and objectives. As your project progresses, use your project budget as a baseline when comparing actual spending to budgeted spending so you can mitigate additional costs as they arise. Efficient project budgeting also helps:

• the decision-making process by determining whether the project is a go or how much to invest in various project activities;
• communicate your financial needs to stakeholders and when you need the funds by;
• project managers follow a baseline to determine if project spending is moving within budget;
• understand how much funds are available for each project task so you can prioritize areas requiring attention;
• determine the skills and resources required for project success and the length of time you need them, especially when you have employees working across multiple projects;
• effectively manage and keep projects on track;
• encourage future brainstorming and planning;
• prioritize tasks with available resources.

What is a project budget template?

Project managers use a project budget template to detail estimates of all costs associated with a project’s completion. The template typically collects information in formats that suit the organization’s financial reporting systems. They may be software-generated or custom-created by the project manager.  Project budgeting begins by entering budgeted costs encompassing various project areas, such as materials, labour, fixed, variable, and miscellaneous expenses, and then listing the actual costs incurred during the period. Lastly, project managers derive the variance between budgeted costs and the actual costs of various project tasks with the variance of the project.

How to create an effective project budget

Budgeting is a critical skill for project managers as it can make or break a project. Create an effective budget for any project using the following steps.

Determine project objectives

Starting with your project objectives helps you understand the direction of your work and acts as the guiding point for the remainder of your project plan. Clearly define and verify your goals so you can use them to benchmark your success upon project completion. The SMART methodology (specific, measurable, achievable, realistic, and time-bound) can help you write clear objectives.

For example, suppose you’re trying to boost the likes and shares on your company’s social media profile. In that case, you can set your objective as “increase engagement on our social media profile by 10% by the end of this quarter”.

Define project scope

Once you have your objectives, define the scope of work required to achieve your goals. Your project scope refers to your project’s boundaries, such as deliverables, tasks, and deadlines—all crucial information for accurately estimating your budget. There are a few things to consider when defining your project scope.

• Time limitations: Are you committed to a tight timeline for the project, or can you take as much time as you need? Tight project schedules can influence resource costs. For example, freelancers may charge a “rush rate” if you’re working on a tight deadline.
• Available resources: Before deciding on specific deliverables, consider the resources you have available. For example, a limited project team may require you to adjust your deliverables accordingly.
• Out-of-scope tasks: These non-goals are anything outside your project scope that may cause scope creep and possible overspending. For example, changes to requirements or additional duties, deadline changes, or anything not mentioned in the original project scope.

Break deliverables down into subtasks

Once you have your deliverables, break them into subtasks to uncover hidden expenses. For example, if one of your deliverables is to design a website, you may break it down into subtasks, such as:

• do user research;
• do competitor and market research;
• plan site layout;
• use wireframes to test the layout;
• establish your branding;
• register domain name;
• choose a web hosting service;
• set up your SSL certificate;
• source and optimize images;
• create engaging copy.

List required resources

Determine the required resources to achieve each of your deliverables and subtasks. Be specific and include indirect costs, like physical working spaces and training. Here are some common cost categories to consider:

• Procurement: How will you acquire external resources?
• Team members: Who will you depend on to complete the work? Are they salaried in-house employees, or will you require additional contractors?
• Equipment: What tools do you need? Include things like design software, Internet service, or extra laptops.
• Training: Will your team require additional training or resources to bring them on board the project?
• Research: What type of data does your project require? Web analytics? User research?
• Professional services: Will you need external professionals, such as marketing or design consultants?
• Space: Will you need additional space for your team to work, such as a meeting room or more desks?
• Travel: Will your team require lodging, transportation, or meal allowance?

Estimate budget amounts

Perform research and collaborate with your team to estimate each resource’s budget. You can do this in several ways:

• Create a work breakdown structure to develop a bottom-up estimate.
• Work backwards from a fixed amount.
• Compare budgets from similar projects using historical data.
• Consider various scenarios, calculate the expected spend for the best, worst, and most likely outcome, and take the average of the three.
• Consult Subject Matter Experts (SMEs).
• Confirm fixed costs from suppliers.

Build a contingency fund

You can never predict a project’s exact cost from the beginning. Establishing a contingency fund provides a financial cushion when costs increase. The common practice is to set aside at least 10% of the total project budget, which can change depending on your project.

Create your budget

Use the following tips to create an effective project budget.

• Line items for each required resource, deliverable, and subtask, including the expected cost.
• Build a timeline detailing when you’ll require each resource and when to spend funds.
• List who’s responsible for each project component.
• Document which portion of the company budget you’ll use for each line item. For example, you may use the IT department budget for new laptops or the marketing department budget to create advertisements.
• Total the expenditures of your entire project.
• Decide how you’ll monitor and track actual costs versus budgeted costs upon project kick-off.

Get project approval from stakeholders

After creating your project budget, you must share it with your key stakeholders and request approval. Your detailed plan should give stakeholders a clear picture of how each line item will contribute to a successful project outcome.