How To Create A Project Budget: 6 Key Steps
Budget Like a Boss: A well-planned budget helps you manage complex projects, align with stakeholder expectations, and handle unexpected costs effectively.
Save Time with a Template: Our project estimate template (available via DPM membership) will help you pull together an estimate and budget fast, so you can focus on other strategic planning activities.
Make Use of Software: Project management software tools can also save time by automatically tracking and monitoring your budget against progress, as well as other project expenditures.
When you’re planning and overseeing many moving pieces, a well-planned budget is essential for achieving your goals and dealing with unrealistic stakeholder expectations or unexpected costs.
But where to start? You’ll want to invest in project management software to help you stay on track and make informed decisions throughout the project's life cycle, as well as create a realistic project budget. Here are the six steps to create one, best practices, mistakes to avoid, and a template.
What Is A Project Budget?
A project budget is a detailed financial plan that estimates the costs of completing your project. It provides a roadmap for managing costs throughout your project life cycle and clarifies how much money is required and where it will be spent.
How To Create A Project Budget
Follow these six steps to create a budget that accounts for all financial aspects of your project.
1. Define Project Scope
A project scope defines what is included in the project and what is not, so stakeholders can align their expectations. Detail your project’s objectives, deliverables, and the work required to complete those deliverables. This helps prevent scope creep, which can cause budget overruns and project delays.
For instance, the scope of a software development project might include the software's key features, such as user authentication, data reporting, or integration with third-party services.
2. Break Deliverables Into Tasks & Sub-Tasks
Break deliverables into tasks and sub-tasks to create a detailed roadmap for project execution. This lets you easily assign responsibilities to team members and set realistic timelines for completion. You’ll get a better understanding of the work and be able to identify specific task-related resource requirements.
For instance, a deliverable for creating a user registration feature on a software development project can be divided into sub-tasks: designing the user interface, developing the backend logic, and testing the functionality. This granularity helps track resource time and allows for more accurate cost estimation.
3. Determine Required Resources
Your budget should reflect the financial costs and human capital vital for successful project execution. Identify all the personnel, tools, and materials necessary to complete each task. The budget must account for each resource to make sure your project can be successfully executed without financial constraints or unaccounted-for risks.
Resources on a software development project might include specialized skill sets such as developers, designers, testers, and any necessary software tools or licenses. Accurately determining the required expertise and the corresponding hourly rates will allow you to budget more precisely.
4. Estimate All Tasks & Sub-Tasks
Calculate the financial resources needed to cover labor costs, materials, and other project expenses for each task. Accurate cost estimation helps you make sure your project’s overall budget is realistic and achievable. To create these estimates, you can use historical data from previous projects, industry benchmarks, and input from team members with relevant experience.
For example, say you worked on a similar software development project that previously required an average of 80 hours for user interface design. You can use this data to estimate the time needed for the current project. Team members can provide insights into their capabilities and how long they believe a task will take, which can help you refine your estimates.
5. Add A Contingency
Add a contingency fund to the project budget to mitigate financial risks. Contingency funds provide a buffer for unforeseen expenses during the project's life cycle. Analyze the specific risks associated with your project and use industry benchmarks or similar projects to determine the size of the contingency fund.
For example, a software project involving new technology may carry higher risks than one using tools and technologies you’re already familiar with. Incorporate a larger contingency in the budget for projects with uncertain elements for peace of mind, financial security, and a stronger ability to address issues without derailing the project timeline or outcomes.
6. Get Approval
Once your project budget is prepared, obtain feedback and formal approval from stakeholders. This makes sure everyone is aligned with the financial plan and project plan and is committed to the project's allocated resources. The budget should be clear, with detailed explanations of estimates, resource allocations, and the rationale behind the contingency fund.
Why Project Budgets Are Important?
A well-prepared project budget helps you track expenditures, communicate financial expectations to stakeholders, make informed decisions, and more:
- Project control: Project budgets provide a control mechanism to guide execution and prevent overspending
- Benchmarking: Measure your actual expenses against budget forecasts to identify variances and take corrective actions promptly.
- Accountability: A clear budget also fosters accountability among team members and stakeholders.
Project Budget Example
Here’s an example of creating a budget for a project involving software development on a mobile app.
- Project scope overview and approach: This might involve breaking down the project deliverables into UI design, backend development, API integration, and testing tasks.
- Required resources: This might include putting together a team with a UI/UX designer, two software developers, a quality assurance tester, and a project manager. Assess each resource's hourly rate and calculate the estimated hours for each task. You might estimate 40 hours for the UI design and 120 hours for the backend development.
- Cost estimates: Estimate the costs for each task and add them together to calculate a total project cost. Add a 10% contingency fund to this total to account for unforeseen expenses. This brings the final budget to $150,000, which you’ll present to your stakeholders, who will review and approve the details.
Project Estimate Template
Our project estimate template helps you make sure you’ve covered all the necessary elements in your project budget. It includes your tasks and sub-tasks, estimated costs, resource allocations, and contingency funds. Download our template to save time that you can instead spend on more strategic aspects of project management.
Tools For Budgeting Your Project
You can also use project management software and project cost management tools to improve your budgeting process and keep an eye on progress. They often include features for tracking expenses, generating reports, and collaborating with team members, which makes it easier to maintain an accurate budget throughout the project life cycle.
Project budgeting software also allows you to input tasks, create accurate estimates, assign resources, and meet timelines. Project budgeting software also allows you to input tasks, create accurate estimates, assign resources, and meet timelines. If your project involves financial management, consider project management software that integrates with QuickBooks to streamline expense tracking and financial reporting.
Here are the most popular project management software tools that you can use to track and monitor your budget.
Best Practices For Creating A Project Budget
By following these best practices, you can mitigate risks and increase the chances of project success.
1. Set Clear Goals & Objectives
Clearly defined and documented goals and objectives allow you to identify the necessary resources and associated costs accurately. Start with the end in mind—your project objectives. Understanding the objectives helps you build out SMART (specific, measurable, achievable, realistic, and time-bound) goals from there.
These goals inform the resources and budget necessary to complete the work. Link all goals to the project objectives in the planning stage to form a baseline that stakeholders can refer to throughout each project stage.
2. Involve Key Stakeholders in the Budgeting Process
Collaboration can deliver valuable insights and help make sure you don’t overlook any critical expenses. Engage team members, clients, and other stakeholders and get their input on potential costs and resource requirements.
This promotes a sense of ownership and accountability and leads to better budget adherence throughout your project’s life cycle. Regular meetings and open communication channels also facilitate this collaboration and let you quickly adjust to stakeholder feedback.
3. Use Industry Benchmarks or Experience
There’s no need to reinvent the wheel when you’re determining your contingency fund. Look at similar past projects or benchmarks for your industry or project type and size, and make sure to factor in your project’s complexity and risk factors.
A contingency fund can mitigate the impact of financial surprises, help you maintain momentum on your project, and avoid delays and going over budget.
Common Project Budgeting Mistakes
Here are some common mistakes you might make on your project budgets and how to avoid them.
1. Underestimating Costs
It’s easy to overlook certain expenses or misjudge materials and labor rates. This might happen when you’re relying on previous budgets or anecdotal experiences rather than conducting thorough research.
To avoid this pitfall, gather detailed quotes from vendors, consider historical data, and involve team members who can provide insights into the potential costs associated with their tasks. This will lead to more accurate projections and a budget that better reflects reality.
2. Failing to See Hidden or Indirect Costs
Hidden costs can arise from various sources, including unforeseen project scope changes, regulatory compliance issues, or administrative fees. If your budget doesn’t take these into account, it can lead to significant financial strain if unexpected expenses surface.
Conduct a comprehensive risk analysis and include a contingency fund in your budget to prevent this. This can help cushion the impact of unforeseen circumstances and make sure your project remains financially viable even when surprises arise.
3. Neglecting to Monitor & Adjust the Budget
Treat your budgets as living documents—review and adjust them regularly based on actual expenditures and project developments. Cost overruns or misallocated resources may blindside you if you’re not continuously monitoring your budget.
Establish a routine for reviewing the budget (e.g. monthly or quarterly). This can help you identify trends and discrepancies early on and make timely adjustments that keep the project progressing, on track, and within financial limits.
Related Documents
Here are some related documents that should not be confused with a project budget.
- A project charter outlines your project's objectives, scope, stakeholders, and overall goals. It provides a framework for the budget. Refer to it when creating your budget to make sure it’s aligned with the project's objectives and that funds are allocated effectively to meet the desired outcomes.
- Work breakdown structure (WBS): The WBS breaks down your project into smaller, manageable components, which makes it easier to estimate costs accurately and identify individual tasks, their requirements, and associated costs. This helps you create a more detailed and precise budget.
- A project estimate is an approximate calculation of the costs of completing a project. It provides a rough idea of the project's cost but can change as more information becomes available. It focuses primarily on the anticipated costs of completing a project. It provides a breakdown of expenses based on the project's scope and is usually prepared during the planning phase.
- A project proposal is a comprehensive document that outlines the estimated costs and the project's objectives, methodology, timeline, and expected outcomes.
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