Every project, no matter how big or small, involves costs. It’s very rare to have endless piles of money at the ready, so having a planned budget for a project is a must. As the project manager, you’ll be accountable for sticking to the budget, so you need to be sure it’s right.

If you under-call the budget, you’ll end up missing milestones, being under-staffed, and having to do the walk of shame to the finance department to ask for more money. If you over-call it, the project might not even get off the ground. So, how do you get project budgeting right? Let’s step through the process, starting with an overview of what a project budget is.

What is a project budget?

A project budget is the total estimated cost of completing each project activity over each phase of a project. It’s important as it helps set expenditure expectations and is critical in getting project approval, ensuring funds are ready at the right time, and measuring performance. It’s a dynamic document, continuously monitored, reviewed, and updated throughout the project.

“The budget is your plan. It’s the baseline that lets you measure your performance against the actual costs as the project moves forward. It helps you hit targets, answer questions, and there’s just the satisfaction of knowing you’re on track.”

Les Carleton, Program Director


What are the components of a project budget?

Project budgets contain all the costs associated with the project. It generally includes:

  • Labour costs: employee wages, benefits, payroll taxes, and overheads.
  • Material procurement costs: goods, services, equipment, and supplies needed for the project that come from external providers.

Under each of these categories, the costs can usually be separated into two broad categories:

  • Fixed costs: these are set for the project and will not change. For example, if you need a certain quantity of a particular item to deliver your project and you have a firm quote from a supplier, this is a fixed cost.
  • Variable costs: these change based on activity. For example, if you have a subcontractor working by the hour on your project and it goes over time, the cost goes up. Variable costs need the most monitoring.

The costs are identified for each project activity and given a timeline. This level of detail is critical in tracking performance throughout the project. For example, if you have 50 hours allocated to design over two months, you’ll know what your weekly budget is so you can spot variances early on.

What is the purpose of a project budget?

The project budget is designed to:

  • Aid in the decision-making process. This could be deciding whether the project goes ahead or choosing how much to invest in different activities within the project.
  • Communicate to stakeholders how much money is needed and when it’s needed.
  • Give the project manager a baseline to help them work out if the project is spending along its desired path.

The benefits of effective project budgeting

We can all agree a budget is essential for any project, but the benefits extend far beyond just knowing what the project is going to cost. Effective project budgeting has the following benefits:

  • By knowing how much money is available for each project activity, you can easily pinpoint areas that need attention.
  • One of the trickiest parts of project management is having the right human resources available. The project budget helps determine exactly what skills you need for what length of time, which is especially useful when people are working across multiple projects.
  • The budget is an effective management tool to see if you’re on track to meet goals.
  • It helps prioritise activities that can be completed within the resources available. Sometimes this means reining in your ambitions but at least you’ll be delivering to expectations.
  • Helps promote future thinking and planning.
  • Project managers who can deliver great outcomes while effectively controlling budgets have great career prospects!

What is a project budget template?

A project budget template is a blank document that prompts a project manager to include a detailed estimate of all costs that are likely to be incurred before the project is completed.

Generally, large organisations have templates that collect information in a format that suits their financial reporting systems. Otherwise, project managers might have a preferred template, use a software package to create one, or build a custom template for the project they are working on.

Project budget example

Our budget example includes all the tasks in our work breakdown structure and lists the person responsible. The fixed and variable costs are itemised for each task to create a budget baseline. Actual costs are added as the project progresses and variances are automatically highlighted. This way, you can see exactly where the costs are straying from budget, and get on to addressing the issues before it’s too late.

How to estimate budget for a project

Budgeting is a critical skill for a project manager and one that takes time to master. To help you build your budgeting competency, we’ve created a step-by-step guide for you to use as a checklist to ensure you cover all bases.

1. Refer to your project scope: the project scope contains the goals, deliverables, tasks, and deadlines for the project. You’ll need all of this information to estimate your budget.

2. Define the resources you need: list all the people and items that you need to complete the project within deadlines. You’ll need to consider staffing, equipment, training, travel, supplies, leases, subscriptions…the list goes on.

3. Understand the resource rate: people who will be working on the project will work at a specific rate, with more experienced people costing more, but often able to complete tasks faster and to a higher standard. Materials for the project get charged at a rate too. You’ll need to understand the rates for labour and materials to complete your budget estimate.

4. Assign budget estimates: now that you have a list of resources, begin assigning a number to each. This will take significant research and collaboration. Each project will be different, but here are some estimating techniques to get you started:

    • ​Use historical data: review actual costs from previous similar projects if possible. Pay particular attention to any lessons learned in past projects to avoid making the same mistakes. This is sometimes called “analogous estimating” because you are basing your estimate on an analogy, or a similar project to the project that you and your team are undertaking.
    • Use maths: sometimes you can determine the total cost estimate by looking at unit cost or duration, then scaling the result based on how many units are needed. For instance, if it took one hour to build one component, then it will take 8 hours to build 8. This is sometimes called “parametric estimating” because you’re reviewing the known parameters to derive your estimate.
    • Consult Subject Matter Experts (SMEs): lean on SMEs or project managers in your organisation or in your wider professional network.
    • Consult suppliers: get fixed costs for project elements where you can and estimates where the requirements are still not fixed. Suppliers are best placed to provide estimates for the products and services that they will be supplying.

5. Establish a contingency fund: it’s basically impossible to predict exactly what everything will cost at the beginning of the project. Having an emergency fund means there’s a reserve for when costs increase. Around 10% of the total project budget is a good rule of thumb, though this can change depending on the project.

6. Build the budget: compile the estimates into your project management software or budget template. Make sure your budget includes constraints, assumptions, and a timeline.

7. Obtain approval: circulate your plan within your team for feedback to identify errors and omissions ahead of your formal approval. When you’re presenting your budget to management or stakeholders, you want it to be right. You’ll also need to be able to confidently justify the thinking behind the numbers.

Project budget management

Project budget management is the process of tracking and monitoring the finances throughout the project. It rates highly among the many skills needed by a project manager.

By regularly monitoring the budget throughout the life of a project, you can identify quickly if costs begin to exceed estimates and adjust before the budget is blown. You’ll also have visibility of extra budget needs in time to secure the funding, so the project doesn’t have to stop for additional approvals.

It’s important to use the original project budget as a baseline and use it to judge variance. As the project changes, you’ll need approval for your changes and then re-baseline your project budget.

As a project manager, you should avoid (like the plague) unexpectedly running way over budget. While the contingency is there to help you manage variance, it can only stretch so far. With careful budget tracking, you’ll see in advance if a project is forecast to go over budget, and you can do something about it.

9 expert tips for better project budgeting

  1. Watch project scope like a hawk: there’s no surer way to blow budget than the dreaded scope creep.
  2. Divide your budget into useful timeframes: For example, you might want to analyse weekly staff costs so that you can quickly address overruns rather than leaving it until the end of the month (or the end of the project) when any issues have compounded.
  3. Try not to let your contractors know what your contingency is: Set the expectation that they can’t exceed the budget unless you know about it well in advance and can manage it accordingly.
  4. Involve others: don’t try to create (or manage) your budget in a bubble. Consult experts inside and outside of your organisation to learn from them. And even though you’re responsible for it, you might not be across the expenditure and needs of other departments that are contributing to the project. So, communicate widely, and often.
  5. Understand your budget: whether you are using spreadsheets, budget templates, or more sophisticated software, keep track of your assumptions and calculations so that you remember how you arrived at your budget estimate.
  6. Don’t fall for the GST trap: make sure you treat GST consistently throughout. Many a budget derails because of GST confusion. Access expert help if you’re unsure.
  7. Consider lag: controlling a project budget can be more difficult than controlling a project schedule. With a schedule, you know immediately if you’ve missed a date. But in most companies, financial information is delayed because of reporting practices. Understand your finance systems and account for them during your project.
  8. Update the budget in real-time: if there are changes, you need to update your budget regularly so you and your team are tracking against the right numbers.
  9. Record the lessons you learn along the way: this will help you and others in future projects.


Why do projects go over budget?

“The only constant in life is change.”



Projects rarely (if ever) go exactly according to plan. Just 36% of organisations are likely to deliver projects that are on budget. A good project manager must be able to identify when the budget is varying and manage those variations.

Here are some of the main reasons that projects go over budget:

  1. Underfinancing: if you underestimate the project cost it will almost certainly lead to budget overrun or total project failure.
  2. Unfeasible cost estimates: accurate cost estimation at the micro-level is critical to creating an overall accurate budget. Make sure you check each estimate for accuracy.
  3. Underestimating the complexity of the project: make sure you break down your project into small parts and thoroughly examine each element so that nothing is missed.
  4. Scope creep: monitor your scope throughout the project because if additions are made during the project, you’ll need to request additional budget to cover it.
  5. Unmet deadlines: time is money and often human resources are a large contributor to the overall budget. When deadlines slip, budgets are blown. You’ll need a great project schedule in place to manage timelines.
  6. Unforeseen circumstances: try to have a backup plan that accounts for literally anything and everything that could happen.
  7. Lack of project manager experience: sometimes budget overruns come down to inexperience on the part of the project manager. If you’re new to project management, seek guidance, find mentors, and monitor available dashboards to track project KPIs.


What to do when a project is over budget

“You need to have a solid handle on the costs because if you leave it until the money runs out, you’re in big trouble. But if there’s been unforeseen events, and you see the budget issues coming ahead of time, you can address them with the steering committee before you’re in too deep.”

Les Carleton, Program Director 


Being over budget is not a project manager’s happy place. But there are ways to effectively manage project budgets, avoid overruns, and pull projects back into line. To be successful, most of these rely on being well ahead of time, so track your budget closely and act promptly:

  • Request an increased budget with a valid rationale and a plan for getting costs back under control.
  • Consider reducing the scope or deferring low priority actions to future projects.
  • Look for opportunities to offset the costs in other areas of the project.
  • Reassign resources to a lower-cost resource. For instance, you could get a more junior team member to perform some tasks, you could consider upgrading equipment rather than replacing it, or you could do training online instead of in person.
  • Use your budget contingency (wisely!).

Budgeting is hard, but worth the effort

Managing the project budget is probably the most difficult part of project management, but also the most important. Even if you deliver the most brilliant outcome, right on time, it counts for nothing if you’ve overspent.

So, aim to continuously improve your skill level as you progress through your project management career. Seek mentoring opportunities inside and outside of your organisation. Ask for guidance. Find resources that explore the latest thinking. And join a community of like-minded people to grow into the project professional you want to be. Your projects and your career will thank you for it.