Six Steps to Creating Your Project Budget

There’s an old saying that “if you fail to plan, you plan to fail.” Every project manager knows that she has to create a realistic project budget before the project begins. This step is not optional because when you’re midway through your project and realize you’ve run out of money, you’re in big trouble.

Although every project is different, there are some commonalities in the steps to creating a project budget. Here are six steps to creating and maintaining healthy finances for a project.

1. Look through lessons-learned documents

If there are records of similar projects within your company, use their project budgets as a model. There’s no point in reinventing the wheel, and this will save you a lot of time and effort. You may want to talk to other project managers to fully understand how their budget models work. Also, consider having a team member look through similar activity costs from past projects to help determine the activity costs for your project. This is called analogous estimating.

However, if there aren’t any historic models that you can use, you need to create your own from inputs from your team and stakeholders. You can draw inspiration from free budget templates available online. You might also want to consider joining industry-specific forums and ask other project managers in your industry how they approach budgeting.

It’s essential to understand the project management tools your company wants you to use. Get the necessary training on these tools if needed. If your company has no recommendations, an inexpensive and good starter program is Microsoft Project. Use this tool to keep track of your costs and to forecast your total project budget.

2. Know your cost

Know how much each resource for your project—such as people, material, and equipment—is going to cost. By taking a look at your project timeline, you’ll know how much time you’ll need for each resource for each activity in your project.

3. Roll up individual activity costs

Multiply the amount of time you need a particular resource by the resource’s cost rate to determine the total cost of that resource for your project. For example, Joe has an hourly rate of $50/hour, and you need him for 100 hours on your project. Thus, the total cost of Joe would be $50 x 100 = $5,000. Next, add up all your resource costs to determine your project budget. This technique is called bottoms-up estimating.

Sometimes the budget for your project is assigned rather than derived from activity costs. If there’s a big discrepancy between the budget that you were allocated and the budget you derived from bottoms-up estimating, you need to speak with your project sponsor. Perhaps you need to ask for more funding or reduce the scope. You may need to do several rounds of estimating before your team and stakeholders agree on the project budget.

4. Add contingencies

After you’ve obtained your project budget, you need to add a contingency budget to it to prepare for unforeseeable events.

Different companies have different methods for determining their contingency budgets. Some prefer a fixed percentage of the total budget (e.g., 10% of project budget), while others add up all of the costs of their known risks and use that amount as their contingency budget.

5. Monitor your progress and resources

Keep track of your project’s daily progress through stand-up meetings (or something equivalent). You need to know what the team members are doing at all times, especially if they are working on tasks on the critical path.

Another component of monitoring your project’s progress involves managing the scope. Scope creep can bust your project budget. You can avoid it by making sure only the changes that are approved by the change control board are implemented in your project. Approved changes may require more funding to be approved by your project sponsor.

Changes are inevitable on a project, so you’ll need to update your project budgets continuously by repeating steps two through five. Project budgeting is not a set-and-forget activity, but rather a continuous activity that requires your daily attention.

Continuous improvement (or what the Japanese call kaizen) is what hones your skills as a project manager and makes your project a success.

6. Communicate changes to stakeholders

It’s vital that you keep your project team and stakeholders “in the loop.” Miscommunication can damage relationships and jeopardize the success of your project.

Be transparent about your project status and costs with your team. Let them know what your expectations are at the beginning of the project, and make sure new team members who join throughout the project are also aware of your expectations. When your team members know what’s expected of them, they are more likely to stay within budget. People will be more careful when they report the number of hours they worked and what expenses they incur during the project. Your team will also be more understanding if you need to make changes.

Before your project begins, ask your key stakeholders what information they will want updates on, how often they will want them, and how they will want the updates delivered (e.g., by phone or emails). You need to set clear expectations with your stakeholders up front, and open the doors for clear communication. As your project progresses, give each stakeholder exactly what he asks for. He will be impressed by your dedication and attentiveness.

Some state-of-the-art projects are hard to budget for because they are large-scale, and they’ve never been done before. If your project falls in this category, try implementing an agile approach.

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