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10th Aug 2021
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.
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
Project budgets contain all the costs associated with the project. It generally includes:
Under each of these categories, the costs can usually be separated into two broad categories:
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.
The project budget is designed to:
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:
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.
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.
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:
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 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.
“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:
“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:
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.
Join now to unlock the benefits of Australia’s leading body for project professionals.
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