Project Budget: How to Do Project Budgeting
A project budget is a plan for how much money will be spent on a project. The project budget plays a crucial role as it helps ensure that the project stays within budget and that adequate resources are available to complete the project.
What is a Project Budget?
A project budget is a plan outlining how much you intend to spend, on what and when. The project budget encapsulates all costs that may be incurred during the project lifecycle, from planning to implementation and completion of the project.
These costs may include personnel, materials, equipment, tools, software, travel, and other costs related to the project.
Why Create a Project Budget?
By creating a project budget, one can plan and allocate resources in a way that reduces the risk of financial barriers arising and the project staying within its financial targets.
Three Reasons Why Project Budgeting is Important:
1. Clear plan: By creating a project budget, one can plan and allocate resources in a way that allows the project to be executed without financial hurdles. The project budget helps break down the costs for the different parts of the project.
2. Identify issues: A project budget also helps highlight potential costs and problem areas in advance, enabling you to address them before they escalate.
3. Information and transparency: Having a clear and realistic project budget is also crucial to gain support from decision-makers and stakeholders. If you can show that you have a thoughtful budget, where you have contemplated and planned for all costs, and the project is feasible within the budget, you increase your chances of successfully driving the project and the likelihood of a successful project.
Studies show that it's common for projects to cost more than initially planned. A survey from the Project Management Institute found that over the past 12 months, only 62 percent of completed projects within the surveyed organisations had kept to their original budget.
A study from McKinsey and Oxford University covering over 5400 IT projects found that on average, 45 percent of large IT projects went over budget. Hence, thorough project budgeting and ongoing monitoring are of utmost importance for many organisations.
Who is Responsible for Project Budgeting?
Typically, it is the Project Manager along with a financial officer who are responsible for project budgeting.
- The Project Manager is the person responsible for leading the project and ensuring it is successfully completed within budget and timeframe. The project manager works with other members of the project team, including the financial officer, to ensure all costs are covered, and the project is feasible within the budget.
- The Financial Officer (Project Economist or Project Controller) is a person responsible for managing and overseeing the finances of a company or project. In the case of project budgeting, it is the financial officer's task to assist the project manager in creating a realistic project budget and ensure all costs are covered using estimation techniques, such as comparing budgets from similar projects or working backwards from a fixed amount.
One can view it as the Project Manager being knowledgeable about the steps in the project that need to be carried out and how much time and resources it will require, while the financial officer has knowledge of how much the different parts tend to cost.
For smaller projects, however, it is usually only the Project Manager who sets the budget, which is then approved by the responsible steering group or boss.
A Simple Template on How to Create a Project Budget
Creating a budget for larger projects may seem overwhelming at first, here are some steps to guide you:
Define the Goal and Scope of the Project
First and foremost, you need to be sure of what you plan to achieve at the end of the project (purpose and goals) and what scope is required.
Project scope is a way of setting boundaries for the project and defining exactly what goals and project deliveries you aim to achieve. To be able to budget and estimate how much the project will cost, you first need to understand the project's scope.
Break Down the Project into Smaller Parts
The next step is to break down the project into smaller parts among various activities, making it easier to distribute costs between them. Common methods of breaking down a project, or a problem in general, are through:
- Top-down: Start from the overall end goal of the project and work your way down to smaller parts. You divide the project into smaller and smaller activities/well-defined parts until the sub-activities are at a level where you can estimate the resources required.
- Bottom-up: Start from what the various activities cost and work your way up. These activities are then summed up to provide a comprehensive picture of the project.
- Estimation: Base your estimates on previous experiences and projects as a starting point, which you can then adjust according to the current project.
As a rule of thumb, top-down goes from the general to the specific, while bottom-up goes from the specific to the general.
Tip: Keep in mind that it's crucial to find the right level for your activities. If they're too large, their contents will be difficult to assess, while if they're too small, a significant amount of detail work will be necessary.
Identify Costs and Resources
The next step is to list the resources and costs associated with the activities into which you have divided the project.
Common examples of costs and resources include:
- Team members
- Team activities
Make an Estimate
The next step is to try to estimate the costs for each item on the list as accurately as possible. A good piece of advice is to base your estimates on previous budgets and consult with knowledgeable people in that area, such as team members or suppliers.
A recommendation, especially for more complex projects, is to consider different situations. Complex projects often have many possible outcomes and may encounter obstacles along the way.
It is often a good idea to try to get an idea of how different scenarios will affect your project budget. For instance, if an event that you cannot control occurs, how will it impact your budget?
However, this could be a daunting task if you have many potential outcomes. A recommendation is to estimate the best, the most likely, and the worst outcome, and then make a weighting and estimation of the potential outcomes.
Have a Buffer
It is always important to have a buffer when creating a project budget. This simply means that you add an extra sum of money for unforeseen costs or events that may arise during the project's course. How large this sum should be depends on the size of the project, but a good rule of thumb is 10-15 percent of your total budget.
Create Your Budget
After you have done your preparatory work and estimated your budget, it is time to create the actual budget. Here, you compile your estimates, and it is common to link the costs to the different activities that the project has. A recommendation, mainly for larger projects, is to try to include a timeline showing when each resource is needed and when the project will use it.
There are several ways you can create your budget, from simple documents to software programs.
Hypergene is a tool that can help you create your project budget. Hypergene is flexible, dynamic, and integrates well with other systems. You can also easily collaborate with others and retrieve information from previous budgets.
If you are interested in a more dedicated project management tool, Hypergene also offers the project management tool Blue Ant, which is a comprehensive platform for planning and managing your project (or your portfolio).
Anchor and Obtain Approval
The final step is to anchor your budget and secure approval from stakeholders and other relevant parties. This is vital to ensure everyone is in agreement with the project budget and that there is adequate funding to complete the project.
Follow Up and Document
During the course of the project, regularly track costs and compare them to your budget. If discrepancies arise, review your budget and make necessary adjustments. An essential but often neglected part of the project is documentation, necessary for capturing experiences that you can apply to future projects.
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