Project budgeting 101

Budgets are typically created in the initiation and planning phases of your project.

It is a helpful tool to reference when communicating with stakeholders and can double as a tracker for your project's progress

Project budgeting best practices

  • Reference historical data: Your project may be similar to a previous project your organization has worked on. It is important to review how that project's budget was handled, find out what went well, and learn from any previous mistakes.

  • Utilize your team, mentors, or manager: Get into the habit of asking for your team to double check your work to give you additional sets of eyes on your documents.

  • Time-phase your budget: Time-phased budgeting allows you to allocate costs for project tasks over the projected timeline in which those expenses are planned to take place. By looking at your tasks against a timeline, you can track and compare planned versus actual costs over time and manage changes to your budget as necessary.

  • Check, check, and double check: Make sure that your budget is accurate and error-free. Your budget will likely require approval from another department, such as finance or senior management, so do your best to ensure that it is as straightforward to understand as possible and that all of your calculations are correct.

Categorize different types of costs

Direct costs

Necessary in order to complete your project:

  • Wages and salaries of employees and contractors
  • Materials costs
  • Equipment rental costs
  • Software licenses
  • Project-related travel and transportation costs
  • Staff training

Indirect costs

Do not directly lead to the completion of your project but are still essential for the project team to do their work. They are also referred to as overhead costs:

  • Administrative costs
  • Utilities
  • Insurance
  • General office equipment
  • Security

A baseline budget is an estimate of project costs that you start with at the beginning of your project. Once you have created a budget for your project and gotten it approved, you should publish this baseline and use it to compare against actual performance progress. This will give you insight into how your project budget is doing and allow you to make informed adjustments.

A reserve analysis will help you account for any buffer funds you may need. First, review all potential risks to your project and determine if you need to add buffer funds, also referred to as a contingency budget. These funds are necessary because new costs that you did not expect are likely to happen throughout the project.

Budget spreadsheet templates

Overcoming budgeting challenges

Challenge 1: Budget pre-allocation You may encounter situations where your budget is already set before you even start the project. Some organizations follow strict budgeting cycles, which can lead to cost estimations taking place before the scope of the project is completely defined.

Part of that planning includes making sure that you are tracking fixed and time- and materials-based expenses. Fixed contracts are usually paid for when certain milestones are reached. Time and materials contracts are usually paid for monthly, based on the hours worked and other fees associated with the work, such as travel and meal expenses.

Challenge 2: Inaccurately calculating TCO

Try to avoid is underestimating the total cost of ownership (TCO) for project resources. TCO takes into account multiple elements that contribute to the cost of an item. It factors in the expenses associated with a product or service over its lifetime, rather than just upfront costs.

If you have a service requirement for a software technology that your team is using, for example, then it is important to budget for the costs of maintenance for that service. Additional types of costs you may need to account for when calculating TCO include warranties, supplies, required add-on costs, and upgrade costs.

Challenge 3: Scope creep

There are several factors that can lead to scope creep, such as:

  • A vague Statement of Work (SoW)
  • Conversations and agreements about the project that aren't officially documented
  • Unattainable timeframes and deadlines
  • Last-minute asks from priority stakeholders

Budgeting terms

Cash flow is the inflow and outflow of cash on your project. As a project manager, this is important to understand because you need funding (cash into your project) to keep your project running.

CAPEX and OPEX Expenses can be organized into different categories. Two of the most common are CAPEX (capital expenses) and OPEX (operating expenses).

  • CAPEX (capital expenses) are an organization's major, long-term, upfront expenses, such as buildings, equipment, and vehicles. They are generally for assets that the company will own and keep. The company incurs these expenses because they believe they will create a benefit for the company in the future.

  • OPEX (operating expenses) are the short-term expenses that are required for the day-to-day tasks involved in running the company, such as wages, rent, and utilities. They are often recurring.

Contingency reserves

Sometimes, a project hits a snag and incurs additional expenses. One way to prepare for unplanned costs is by using contingency reserves. Contingency reserves are funds added to the estimated project cost to cover identified risks. These are also referred to as buffers.

Management reserves

While contingency reserves are used to cover the costs of identified risks, management reserves are used to cover the costs of unidentified risks. For example, if you were managing a construction project and a meteor hit your machinery, you could use management reserves to cover the costs of the damage.

Contingency reserves are an estimated amount, whereas management reserves are generally a percentage of the total cost of the project. To determine a project's management reserves, you can estimate a percentage of the budget to set aside. This estimate is typically between 5–10%, but the amount is based on the complexity of the project. A project with a more complex scope may require higher management reserves. Note that the project manager will generally need approval from the project sponsor in order to use management reserves.

Procurement process

The typical procurement process:

  • Initiating: planning what you need to meet your project goals
  • Selecting: deciding which suppliers and vendors to use
  • Contract writing: developing, reviewing, and signing contracts
  • Controlling: making payments and maintaining and ensuring quality
  • Completing: measuring your success

Tips for completing, ask yourself:

  • Were the materials created good quality?
  • Were there any issues with labor contracts?
  • How were your relationships with vendors?

Request for proposal (RFP) Sent to many vendors for the purposes of selecting the best offer. Ask Subject matter expert (SME) for input.

Statement of Work (SoW) Sent to the selected vendor as an agreement.