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What is a project budget? Definition
A project budget is a comprehensive overview of estimated or allocated financial resources required for the planning, execution, and completion of a specific project. It represents the total amount of money that is allocated to various activities, tasks, and resources needed to achieve project objectives within a specified timeframe.
What project costs are included in the project budget?
A project budget typically includes:
- Costs of resources - salaries, wages, benefits, and other labor costs,
- Direct costs - costs directly associated with the project's activities, such as purchasing software, conducting research, or renting a workspace,
- Indirect costs or overhead costs are not directly tied to a specific project activity but still contribute to its overall cost. Examples include administrative expenses, utilities, office rent, and general supplies,
- Contingency reserve - a portion of the budget set aside for unforeseen events or risks that may arise during the project. It serves as a buffer to cover unexpected expenses or changes in project scope.
- Miscellaneous expenses: This category covers any additional expenses that may arise during the project but are not accounted for in other budget items. It allows for flexibility in addressing unforeseen costs or changes in project requirements.
How to create a project budget?
The project budgeting process consists of a few steps that are critical for estimating the actual costs of your operation, as well as the revenue required for project's success. Here is how to create project budgets in any industry.
Step 1: Define a project scope
In project management, objectives and milestones play a pivotal role. Importantly, they also have the most significant impact on project budgeting - that is why project managers should pay a lot of attention to this part of project budget management.
To ensure all the objectives are included in the project plan, create a project scope or a comprehensive overview of all the project tasks that must be completed in your operation. Use project management software to put these project deliverables on the project timeline and create a clear path leading to the project's success.
Last but not least, consult the project scope with project stakeholders or more senior members of a possible project team to ensure you are on the same page and can tell whether your company can successfully complete the operation. Use historical data from previous projects or current similar projects to make the description of the entire project more accurate. That is especially important for fixed-price projects, which depend heavily on accurate estimates preventing them from exceeding the project budget!
Step 2: Create a work breakdown structure
Or, in other words, break down the work into specific activities or tasks. Ensure that the objectives will be gradually achieved as the project progresses without delays and other avoidable risks. A well-defined project plan should also specify the dependencies, priorities, and risks a project manager can encounter throughout the duration of the operation.
Step 3: Resource management
This is the stage in the project budget creation process when you should start translating the objectives into the people's time that will later on become a base for project budgeting.
To create even a basic project budget, you need to specify what resources you will need. A comprehensive resource management plan should include information on:
- skills and specialization of people required in the project,
- the time project managers think their team will need to complete all the tasks,
- the availability and capacity of your desired resources,
- maximum or estimated costs of their work,
- any physical resources the team might need throughout the project.
Using this info, you can assign resources to the task list and see whether you have enough resources compared to what your project requires.
Step 4: Create a budget estimate
Before you move on to the official project budget, try to predict the actual costs of your project using cost estimates.
Include common project cost categories in project management, such as:
- the actual cost of work - try not to use estimates, but the actual wages of the employees you would like to assign to your project,
- project and company overheads - you can calculate the exact values using our cost allocation formula,
- administrative expenses.
When in doubt, do not hesitate to consult senior employees, project champions, other project managers, or any project budget plan for former operations to create a detailed estimate. The project costs you calculate now will impact your project's final outcome; that is why any unexpected costs are more than undesirable!
Step 5: Create contingency reserves (or contingency fund)
Even the best project budget template might not be accurate enough when your project begins - and no project management software can predict that. That is why it is up to the project manager to assess potential risks or uncertainties in project budgeting and allocate a contingency reserve, or, simply, some additional money your project might need to cover unforeseen project expenses. This buffer will help accommodate unexpected expenses or changes in scope.
If possible, use the information acquired during creating a project budget in past projects, or similar project you have heard about, to identify the most common obstacles your new project may face in the future.
Naturally, accurate estimates from one of the previous steps can already mitigate those risks; however, the actual budget might still be full of surprises. Therefore, you should always include some additional funds in your project budgets.
Step 6: Create a project budget
Having prepared everything you need for a project budget, you can create a project budget example independently.
To do so, use project management software with financial options - for example, Primetric - to compile all the cost estimates into a comprehensive budget document. Group costs from the entire project by category (e.g., personnel, equipment, materials) for easier tracking and analysis. Include overheads to create an accurate budget. If necessary, use the information from past or current projects with similar specifications or other historical data to narrow down the scenarios you need to cover to track costs.
What should a final project budget include?
As you can see in the project budget example above, your project budgeting should include:
- Detailed breakdowns of costs associated with each deliverable or stage,
- The actual cost of work of your project team,
- The person responsible for each budget component,
- Comprehensive summary of project expenditures, including individual totals for each department budget involved, if applicable,
- Provision for tracking actual and budgeted costs once the project is underway.
Step 7: Monitor the project budget
In project management, project budgets are not documents that can spend the rest of their lifespan hidden deep down your drawers. Instead, you need to control project costs after your operation kicks off.
To have a total project budget at hand, regardless of the circumstances, we recommend you use the automatically generated budget report included in Primetric. This tool can track time worked on the project, import it from other tools, and calculate the associated costs for every assignment. Then, the data is gathered in a single project progress report to provide key stakeholders with information on a budget of a current project or multiple projects at once - just like shown in the example.
Project budget templates: create your own project budgets!
Of course, you do not need as many words to create your project budget as we used in this article. You simply need a project budget template you can alter to your needs!
No need to look for it any further - simply click here and create a project budget in just a few minutes.
Project budgeting tips: improve your project budget management now!
Your project budget is still far from perfect? Here's how you can improve it with our project budgeting tips.
Involve key stakeholders
Collaborate with project stakeholders, including team members, senior specialists, and finance experts, to gather input and insights during budgeting. Their perspectives can provide valuable information and ensure alignment with organizational goals.
Conduct detailed cost estimation
Take the time to estimate costs for each activity, task, and resource required. Use historical data, industry benchmarks, expert opinions, and vendor quotes, if applicable, to make your estimates as accurate as possible.
Manage risks before they impact your projects
Consider potential risks and uncertainties impacting project costs. Allocate a contingency reserve to accommodate unexpected expenses or changes in scope. Regularly monitor and assess risks throughout the project to minimize their impact on the budget.
Prioritize essential items
Identify critical items that are necessary for project success and allocate resources accordingly. By prioritizing essential deliverables, you can focus your budget on high-value activities and reduce the risk of overspending on non-essential items.
Document assumptions and constraints
Document any assumptions made during the budgeting process and note any constraints or limitations that may affect the budget. This helps provide clarity and a reference point for decision-making throughout the project.
Communicate budgetary information
Ensure that stakeholders know the budget and understand how it aligns with project goals. Transparent communication about budget constraints and progress can help manage expectations and foster collaboration.
Evaluate and learn from past projects
Analyze budget performance and lessons learned from previous projects. Identify areas of improvement and apply those insights to enhance your budgeting process for future endeavors.
Remain adaptable
Recognize that changes and unforeseen circumstances can impact the project budget. Be prepared to revisit and adjust the budget as needed throughout the project life cycle, while focusing on delivering value within allocated resources.
Learn more about project budgets and finances right now!
We have prepared dozens of other resources you can use to improve your company's and projects' business performance. Go to our blog and read about:
- the overhead absorption rate,
- previsión de ingresos,
- 6 project budgeting mistakes you might want to avoid,
- preventing employee bench,
- cost overrun,
or, if you want some more help with your project budget, simply book a demo with Primetric and improve the process from start to finish (and even after that!).
