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How to Create a Project Budget

An investment of $500 million was deemed a loss, as the initiative to overhaul the California court management system came to a screeching halt. The new system was supposed to replace 70 legacy systems with a single platform that would automate court operations, but the initial estimate of $260 million in 2004 rose to $1.9 billion by 2010. One of the main reasons for the project’s failure was a lack of an accurate project budget.

California’s half-a-billion-dollar debacle is an expensive example of how damaging improper project budgeting can be. Nearly every project – of every size – needs a budget. A budget might be simple, like a basic accounting of labor hours for a small initiative, or complex, like budgeting a nine-figure construction project end-to-end.

According to McKinsey Insights, on average, large construction projects take 20% longer than planned and run 80% over budget. And it’s not just the construction industry that’s prone to budget problems. Harvard Business Review notes that the average IT project ends up 27% over budget. Across all industries in the United States, PMI estimates that for every $1 billion invested, $122 million is wasted due to poor project performance.

Inadequate budget planning can derail an otherwise promising project, regardless of its size. This is why understanding how project budgeting works and documenting your project’s finances is essential to your project’s successful completion.  

What is a project budget?

A project budget is a prediction of all costs and expenses necessary to complete a project within a specific timeframe. These expenses can include labor, equipment, and other associated costs. For simplicity and accuracy, each task within a project should be assigned an individual budget.

Putting together a project budget can help you make informed decisions and answer questions like, Is my project feasible given the resources I have?”                                                                               

This article aims to help you make your project budget predictions as accurate as possible.

What does a project budget include?

There are two essential aspects to project budgeting: resource planning and cost estimation.

Resource planning

Resource planning is the process of determining how your business will allocate resources to a project. The purpose of this step is to maximize output from the available resources. Start by identifying the resources you need first, then determine what resources are actually available and map them out against project milestones. For example, assign tasks to team members based on their availability and expertise, or allocate materials and software necessary to complete the project. This stage can be simplified by using tools. For example, you can designate responsibility assignments with a RACI Matrix template from Spreadsheet.com:

RACI Matrix Template
RACI Matrix Template
Cost estimation

Project cost estimation is the forecast of the resources and budget needed for successful project execution.

After you plan out the resources needed for the project, calculate their costs based on the following categories:

  • Direct Costs: Costs that can be directly attributed to your particular project. For example, rented or purchased equipment, materials, team travel, and wages.
  • Indirect Costs: Costs that can be associated with multiple projects, instead of being directly attributed to just one. For example, project management software can be used for multiple projects.
  • Fixed costs: Costs that remain the same over time. For example, employee salaries and equipment rentals.
  • Variable costs: Costs that change as time passes. For example, cloud storage billing, subcontractors working on hourly rates, and electricity consumption.
  • Sunk costs: Money that has already been spent. This category can include any combination of expenses from the above categories. 

Don’t forget to include taxes and other hidden expenses in your cost estimate.

3 steps to estimating and managing a project budget

Here are the steps to help guide you through the process of creating a budget for your project plan.

Review and refine your draft until you achieve the desired project outcome with the budget and resources you have at your disposal.

Step 1. Define your project scope

To determine the cost of your project, first, you need to determine its scope, expected deliverables, and timeline. For larger projects, consider creating a work breakdown structure (WBS). By breaking down the project into smaller components, WBS provides a step-by-step approach to help tackle projects with many moving parts. Use a tool like Spreadsheet.com’s WBS Project Management template to assess your resource requirements for budgeting.

WBS Project Management Template
WBS Project Management Template

Use a Detailed Project Budget with a WBS template to simplify things even further. It helps you break down budget items by task using row hierarchies and uses rich data types to assign tasks to owners.

Detailed Project Budget with WBS Template
Detailed Project Budget with WBS Template
Step 2. Put together cost estimates 

Review historical budgets used in similar projects and talk to colleagues or subject matter experts who can provide insight into different project components and their respective costs.

Then, put together your project cost estimate by using one or multiple of the following methods:

Analogous estimation

This technique uses data from similar (analogous) projects to establish a cost estimate. It uses assumptions and relies on similarities to other projects with respect to cost values, variables, quantities, etc.

To establish reusability, analogous estimating needs to include expert judgment. Analogous estimation is often used when there is limited information about the project being estimated.

Parametric estimation

The parametric estimation uses statistical algorithms to determine the relationship between variables and historical data from past projects. Using this, it models the current project budget by applying data analysis tools.

This results in an accurate and tailored project budget compared to analogous estimation.

Three-point estimation

Based on the information available, a three-point estimation determines the probable outcomes by looking at the best-case, worst-case, and most likely, or “best guess”, scenarios.

In this formula, the likelihood of reality matching each estimate is calculated. This helps with risk mitigation, as it considers critical scenarios like cost overruns.

Step 3: Monitor your project budget

Detecting potential budget red flags early on will help you avoid disruptions to the project workflow. Tools like Spreadsheet.com’s Project Budget template can help you monitor your project budget.

Check it regularly or configure automation to send alerts when budget deviations occur, like a task going over budget.

Automations are not limited to email notifications. Use them to send messages to a communication platform of your preference, such as a Slack channel, Salesforce, or text message – significantly simplifying project communication.

Spreadsheet.com Project Budget Automations
Spreadsheet.com Project Budget Automations

Tips to keep your project budget under control

Keep stakeholders informed

Establish clear roles and responsibilities for all team members and foster collaboration.

Track project scope

Avoid scope creep by documenting your project requirements in detail.

Develop a communication strategy

Encourage and enable team members to share updates in real-time to keep the project on track.

Use project management software

By providing a central place for monitoring progress and communication, project management software can help you bring your project to successful completion. 

You can create accurate project budgets with informed analysis and by tracking real-time data that facilitate alignment between all stakeholders. Set your project for success with Spreadsheet.com’s Project Budget template.

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