What is a Project Budget?
Regardless of whether we're talking about budgeting in relation to our personal or professional lives, it isn't a widely beloved topic. It isn't glamorous or fun and it revolves around one central activity... crunching numbers. Nevertheless, budgets are a necessary evil. When they're thorough, accurate, well-organized, and thoughtfully estimated, they're as good as gold.
A project budget's main goal is to estimate the total cost of an entire project. It's basically a formal document that outlines the cost estimation of a given project from beginning to end.
Project budgets are sometimes found on their own, but can also be parts of project management plans, project plans, and work breakdown structures (WBS) to name a few.
If we're being honest, we all know that most projects revolve around money and resources. Usually, the more money you have access to, the easier it will be to develop a successful project. Project budget management is incredibly important for that very reason.
Don't make the mistake of thinking that project budgets are only necessary for complex projects. That couldn't be farther from the truth. No matter the size of your current project, you (and your finances) will benefit from assembling a well thought out project budget.
Why are Project Budgets so important?
Project budgets are important for so many reasons. The most basic reason is that projects are largely centered around the money and resources they have access to, as mentioned above. Every step of your project will require different amounts of money and resources and it's vital to know you have enough to accomplish everything you need to.
Project budgets are also fundamental parts of project financial planning in other ways. For example, project budgets can actually help with the procurement of additional funds. If your project needs more resources at any point throughout its lifecycle, a well-organized project budget will help you present that need to sponsors and stakeholders. They'll want to see where their money is going and why you need it.
Project budgets are also great tools for project monitoring and control. They'll help you and your project team ensure that you stay on target in terms of cost management and don't overspend. This will help you avoid any nasty surprises or awkward explanations when you finish your project!
Who is responsible for Project Budgets?
Project budgets are normally formal, high-level professional documents. As a result of this, team leaders and other figures with some degree of authority in a project are normally responsible for project budgeting.
People such as project managers, key stakeholders, clients, and project sponsors usually assemble project budgets in the early stages of a project's lifecycle. When the budgeting process is finalized, they share their work with project teams, human resources, and other team members.
Having said that, where there's money, there's power!Project budget responsibility largely depends on where the money is coming from. The person who's bringing the most money or resources into a given project normally has the most say in total project cost.
When's the ideal time to put together a Project Budget?
As noted above, projects can't happen without money and resources involved. Because of this, putting together a project budget has to happen right at the beginning of a project's lifecycle. A project simply can't exist without a project budget.
Think of it this way... you need to know what you're working with. Whether you're working with abundant or limited resources, having an accurate picture of those resources is essential for project planning purposes. A successful project in the making should have a strong project plan that acts as a road map in its earliest stages. A project budget ensures that you have everything you need to account for every element of that plan.
What are the key elements of Project Budgets?
There are almost countless different ways to approach the development of a project budget. Typical elements depend on the specific needs of a given project, but the following can be found in the majority of project budget templates:
Project basics
Think details such as project name, project scope, current date, project manager, project sponsor, key stakeholders, and project team members.
Project tasks, stages & milestones
The project schedule is arguably one of the most difficult parts of a project to put together and is essential when it comes to making accurate estimates. Basically, your project needs to be broken down into tasks so that you and your team can accurately assess how much money each task will cost you. You may also need to include sub-tasks.
Budget items
Also known as line items, the most commonly seen are labor costs and material costs. Labor and materials costs come up in nearly every project in the world and are often the most expensive. Other line items depend on your project's variables, for example, travel costs.
Estimated costs vs. actual costs
This allows your team to assess the accuracy of your budget estimate and will help you budget for similar projects in the future.
Project expenses vs. project income
This section isn't always included, but it can be very useful if your project is already generating or receiving some form of income.
One-time vs. recurring expenses
Once again, this depends on the nature of your project. However, it can be useful to differentiate between one-time expenses (for example, buying materials) and recurring expenses (for example, contracting monthly services from a marketing agency).
Common project budget cost categories
Depending on the nature of your project, there are so many different budget items and costs that you might need to take into account. Here are some of the most common (and significant) project costs:
Labor costs
Also known as human resources costs, this refers to all the fees associated with employees. It also includes temporary workers and freelancers working on your project.
Material costs
All the material items that are needed to bring your project to life.
Travel costs
If your project involves travel, this encompasses all associated costs. This extends to modes of transportation, lodgings, meals, event fees, and the like.
Training & professional development
Any specialized training, research, or study that might be required by team members to carry out your project.
Professional services
Different than human resources costs, this category applies to specialized services contracted externally such as legal counsel, financial consultants, marketing agencies, design studios, and so on.
Equipment & technology
Closely related to material costs, this category applies if you need to make any significant changes, upgrades, or developments to your equipment and technology to complete your project.
Contingency reserves
It's always a good idea to add a little extra. Most project teams add 5-15% to their finished budget in order to account for any oversights and ensure that the total budget covers all the project activities.
Noteworthy indirect costs
This accounts for costs that are not directly related to a project, but that has a connection to it nevertheless. Indirect costs should only be indicated in your project budget if they're significant. Using more pens and pencils while working on project work? Probably not significant. Paying higher salaries due to overtime hours? Significant.
Our free Project Budget template
As you can see, there are a lot of elements that go into an effective project budget template. Instead of having to worry about developing your own template on Excel or another project management software, why not try out our free project budget template below?
Don't delay and get going on those cost estimates. Our template is easy to use, effortless to customize and built for collaboration. You'll love working on it with different team members, even if they're remote. Save yourself the headache of developing your own template, especially if you're just getting started.
How to estimate your project budget
When putting together a project budget, one of the most difficult aspects is making sure that your pricing estimates are accurate. There are a few different ways to approach this, and they all have their respective advantages and disadvantages:
Bottom-up estimation
If you want to put together an extremely accurate budget, this is the way to go. The downside is that you need to work with a high level of detail for it to work. Basically, you break your project down into tasks, stages & milestones, estimate their costs, and add everything together.
Top-down estimation
With top-down budgeting, you start with an established budget and figure out how to break it down and allocate it from there. This approach is the opposite of bottom-down estimation and therefore has opposite strengths and weaknesses. It doesn't require a lot of time investment and can be used effectively as a baseline, but it usually provides a pretty rough budget estimate.
Analogous estimation
This is a fancy way of saying estimation based on similar projects. This works especially well if you're an experienced project manager or already have a decent amount of experience in the project management world. Basically, you use data and information from past similar projects to estimate the approximate cost of your current project. This approach is fast and usually quite general, making it ideal for the early stages of project proposals.
Parametric estimation
Similar to analogous estimation, this approach works best if you have a background in project management. Different than analogous estimation, however, parametric estimation depends on historical data from specific parts of different previous projects. When considered together and applied to your current project, this provides an accurate cost estimation.
Three-point estimation
This approach can be used on its own or in conjunction with some of the other techniques used above. It involves determining a best case scenario, a worst-case scenario and a realistic case scenario for your project budget and presenting that to your project team. There's a lot of variety with three-point estimation approaches, but they typically go over well because they're based on transparency and take different eventualities into account.
6 top tips for creating a great project budget
1. Consult externally
If you haven't worked on similar previous projects or don't have much personal experience in your project's industry, it's a great idea to consult historical data and other experienced professionals when working on a project budget.
Experience is the best teacher. So, if you're trying to estimate the marketing costs for your project, reach out to a marketing professional in your community and ask them what their thoughts are. Odds are that their estimation will be more accurate than yours!
2. Prioritize early on
This especially applies if you're working with a lower budget or more limited resources. It's a good idea to determine your biggest budget priorities early on in your project. Ask yourself questions like "What are the most important aspects of this project?" and "If we're going to splurge on only one part of this project, what should it be?" This will help determine the right budget for you and assist in your project planning process.
3. Stay open to change
Putting together an accurate project budget early on in the planning process is important, but make sure to keep it dynamic. Don't be afraid to add or modify elements as you go. If you use a project budget template like ours, it's easy to make updates in real-time and incorporate any changes that might come up into one central budgeting document.
4. Keep everything updated
As mentioned above, project budgets are often subjected to changes... and that's okay! However, if you're making any changes to your budget, ensure that all the most important members of your project team are informed. If you have a central project budget document (hint: you should), make sure it's always updated with all the most recent information.
5. Use a template
Putting together a project budget can be daunting, especially if you haven't made a similar one before. If you're feeling overwhelmed, the best advice we can give you is to use a free template like this one. You'll save time and have a great basis to work off of.
6. Know your project inside & out
When it comes to project budget development, the most important factor in developing an accurate cost estimate is knowing your project as well as possible. The more detail you have, the easier it'll be for you to make well-informed cost estimates and ultimately assemble a precise project budget.
An excellent project budget is worth its weight in gold
Project budgets aren't the most exciting parts of the project planning process, but they are incredibly useful. When they're done well, they're worth their weight in gold. They help accurately estimate project costs, facilitate planning, prioritization & resource allocation, assist with project monitoring, and act as tools to secure additional funds when necessary.
Trust us, if you invest the time necessary to put together a great budget, you'll reap the benefits for the rest of your project. Use this guide as a reference to refer back to and it'll be impossible for you to go wrong.
