How much will the project cost? How long will it take? When can we deliver? Learn how to build out a project budget and schedule so you can answer those questions with confidence.
Together with time and scope, a project budget is the bread and butter of every project.
Underestimate it and you end up with insufficient resources, not to mention a stalled project. Overestimate it, and you risk getting no approval. In fact, according to PMI, 38% of project failures are due to inaccurate cost estimates.
Don’t worry, though. You can learn the means to create a project budget, even if you've never done it before. The tools you need - cost types, budgeting methods, and the budgeting process - lie ahead of you.
A project budget sums up all the costs of individual activities, tasks, and milestones needed to successfully deliver a project. This includes labor and material costs, but also contingency reserves to accommodate for unforeseen risks.
The project budget is not static, though. The output usually consists of a cost baseline, which helps you compare the actual spending with the original project budget and revise it when changes occur.
As a project manager, the project budget is your best ally when it comes to:
But most importantly, a project budget will build up your project allocation muscle. Is one expensive project better off than two cheaper ones? Then it might have a higher impact. Decisions like these allow you to prioritize strategically and better lobby your projects.
Now off to the costs that go into creating a project budget.
In short, the project budget is calculated by adding up all the expenses that will go into completing a project. Exactly how you calculate it will depend on the project budget method you will follow for this - whether that means relying on high-level historical data of the overall project, or specific hourly rates for all the resources that will be involved in the project, on top of the materials and equipment that will be in use.
For instance, you might calculate your project budget by aggregating all the items in your WBS (Work Breakdown Structure) — tasks, tasks lists, and milestones — or rather, how much it will cost to complete them.
Every project incurs costs. The gist is to capture all the existing costs, especially the hidden ones, that can impact your project budget.
Here are five project cost categories you can use to get an accurate cost breakdown.
People, equipment, and material costs. These are what the project management body recognizes as standard resources. They represent a good starting point but remember to include variable and operational costs too.
Direct vs. indirect costs. Direct costs are closely tied to the actual project. You have to buy them to get the project going. Examples include equipment, licenses for say project management software, and so on. On the other hand, indirect costs are overhead costs that are tied to the project indirectly. Examples include office rental, heating, lighting, and janitorial services, to name a few.
Fixed vs. variable costs. Fixed costs remain constant over the entire project, like utilities. Variable costs, though, change with the length of a project, either on an hourly, piece, or user basis. Examples include salaries, training, legal advice, and consulting fees.
Operational costs. Some equipment might require a specific type of “fuel” to function. Copy machines run on ink cartridges, office spaces on electricity, you get it. When tying the budget, make sure to account for all hidden equipment and machine operational costs.
Sunk costs. Perhaps the most sneaky of them all, sunk costs are those that have already been spent. They are considered “spilled milk” as the famous sunk-fallacy goes. In other words, unrecoverable and should not be considered when making project decisions. For example, if you’ve invested $1 million in a project and want to spend $500k to complete it, you should probably stop as the investment is not worth it.
The list above is, under no circumstances, an exhaustive one. So tread carefully and choose the combination of categories that uncover most of your project costs.
➡️ Further reading: The Long & Short of Project Cost Management.
Capturing project costs is just half of the equation. You also need to estimate them as accurately as you can. A job that becomes harder with the size and complexity of a project.
Even though a universally accepted project budget template doesn’t exist, there are several ways to estimate a project budget.
The bottom-up method first determines the individual cost of activities within a project, then sums them up to create the final project budget. This begs the expertise of the actual project members working on those activities, as they are in a better position to estimate them.
👍 PROS: Detailed task breakdown.
👎 CONS: Time-consuming to identify the smallest task units.
The top-down method is the opposite of the bottom-up approach. It starts with the project cost first, then divides a portion of it to individual activities. This is a standard method for flat rate projects, where project managers use historical data to determine the project budget.
👍 PROS: Less time-consuming.
👎 CONS: Less accurate as the project scope and plan are not yet defined.
NOTE: So far, we’ve covered project budgeting methods. The following are task budgeting methods and ultimately build into the first two. Use them when you can’t accurately estimate a task’s cost with enough confidence.
As the name suggests, the analogous method estimates the cost of a project by analyzing data (project scope, budget, duration, etc.) from similar past projects. Here, you’re dealing with a gross-value estimate that must be adjusted for risks and known differences, as rarely two projects are the same.
👍 PROS: Less time-consuming and less costly.
👎 CONS: Not so accurate, should be used with other budgeting methods.
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Unlike the analogous method, the parametric estimation technique uses unit rates (hourly rate, square meters, etc.) and parameters from similar projects or industry standards to calculate the project budget. The unit rates are then multiplied by the number of units. For example, if a masoner is laying tile floors for $100/square meter, you can use this rate or an industry-accepted one to estimate the project budget.
👍 PROS: More accurate.
👎 CONS: Depends largely on a unit rate’s price, quality, and availability.
The three-point method uses the most optimistic (O), the most pessimistic (P), and the most likely (M) cost estimates in a weighted formula - (O + 4M + P)/6 - to determine the budget closest to reality. The method is perhaps the most accurate and will help you avoid project cost overruns by identifying and taking into account known risks.
👍 PROS: Most accurate method.
👎 CONS: None.
With a clear understanding of the available types of costs and project budgeting methods, it’s time to create the actual project budget. We’ll follow the budgeting process closely in Runn.
The best way to scope a project is to create a work breakdown structure (WBS). Hence, divide your project into task lists, tasks, and milestones to understand deliverables and inform your stakeholders about what they will get in return for their money. From here, you’re in a better position to identify the costs and resources required.
To illustrate this, we will create a time & materials project called “Landing page”. Remember that in Runn, all projects are divided into task lists. To add one, simply click and drag on the project timeline and do so for the rest of your project phases.
Next, estimate each task as optimistically as you can. Either by looking at historical data from similar projects or using one of the mentioned task budgeting methods.
In Runn, you can assign a business cost to each user. This is the salary you pay to keep your team members working. To define the business cost:
a. Go to Manage, choose People, and select a user.
b. Click on the three ellipses, then Edit.
c. Assign a different Cost to business.
What’s left is to schedule resources for each task list and mention the number of working hours.
The software then automatically calculates the overall resource cost (on a task list basis) by multiplying the hours scheduled with the cost to the business. To find out this figure:
a. Go to Manage, select Projects, and choose your project.
b. Scroll down to Phases for the cost breakdown.
c. Check the People Cost column.
Contingency reserves are emergency funds that safeguard the project against known and unknown risks. They are meant to be spent, so always include them, even if they make the project look expensive. A good margin is somewhere between 5-10%, but know that riskier projects will require more contingency.
Luckily, Runn has placeholders for different role types, each with its own cost, just in case you need an extra designer or developer during the project execution.
In terms of project accounting, don’t forget about taxes too. The majority of suppliers are sending quotes without taxes. Account for them to create a realistic, tax-inclusive budget.
Once costs, contingency, and tax are known, add up all your estimates to get the cost baseline. This is your official measurement yardstick. Use it to track your spending against the original budget and keep it in close range, as you will often reference it.
Also note that beyond this point, you can’t make any budget changes unless you’ve received special approval from your sponsors.
If you’ve followed the previous steps, the cost baseline should be automatically calculated and available under the project overview’s Project People Costs.
The final step is to get budget approval from your sponsors and stakeholders. Initially, the sum requested might be a little higher than expected, so prepare for some fund cuts. Nevertheless, your goal is to arrive at an approved budget with as fewer iterations as possible.
To better convince stakeholders of the value of your project, Runn allows you to assign a rate card to each type of resource. This is the project’s revenue. To add a rate card:
a. Go to Manage, choose Rate Cards, then New Rate Card.
b. Select Hourly rate (assuming you run a time & materials project).
c. Assign hourly rate values for each role.
The platform will then sum up all the earned value and display it under Project Revenue, right next to the Project People Costs, so you can calculate the project profitability with ease.
NOTE: In this example, we’ve used the bottom-up estimation method. If you want to use the top-down estimation method, go directly to the project’s Budget tab and enter the total scheduled hours for each resource type.
Pay in mind, though, that for the final budget, Runn will consider the rate cards (a.k.a. the actual billable hours), not the resource cost to the business.
Following the how-to step-by-step guide above, let’s see what your project budget could look like if you were to go with the WBS model (which goes hand in hand with the bottom-up project budget planning approach).
In Runn’s example for “Project Leo” below, you can see that we’re working with a project budget of $200,000. Whether it is your starting point or end goal, you can either see what you can deliver within that amount of money or how much you money you will need for what you promise to deliver.
Assuming that we already know what project we’re building (let’s say, building an app) you can plan out project tasks, task lists, milestones, and, most importantly, roles — the people you want to work on the project, their seniority, expertise, availability, and rates.
In the example below, we’re showing you four expenses that will go into the project: designer, developer, project manager, and other expenses like equipment or materials used, as well as taxes or other one-off costs.
With the required roles and expenses in mind, we’re adding hourly rates of each person to work on the project, the number of hours they can invest in the project, and the total budget each role will require to cover. Once all of that gets added up, you can see the total project budget, which in our case is $173,000 with total hours worked on the project.
Note: this project budget example is fairly high-level and doesn’t account for the intricacies that usually go into projects. Ideally, you will aim for your project budget examples to be a lot more elaborate and multi-angled.
But no matter how complicated they get, Runn will do all the maths for you — just be sure to leave no stone unturned when planning out your potential project expenses.
What you’ve seen so far is a simple approach to project budgeting. In reality, though, the process begs a few observations.
Never shrink numbers to fit the budget. They might look good on paper, but when the budget is approved, the shortcomings will surface quickly. If you’re not confident enough in your budget, revise the scope instead and make sure all team members understand the project context.
Include the accuracy of each estimate. At the end of the day, estimates are just estimates: honest guesses made in the light of a percentage of known information. You might do them in a rush or not take into account unpredictable random events such as black swans, a case in which their accuracy diminishes. That’s why you must always specify their level of accuracy. As the PMBOK suggests, a project might have a rough order of magnitude (ROM) estimate between -25% to +75% in the initial phase. Later, as it progresses and more information is known, the accuracy could vary between -5% and +10%.
Take project risks seriously. There’s barely ever a project with no risks involved, unless you have a project with unlimited time, resources, and budget, which we all know is a fairytale. If you have a risk manager, get together with them and if not, take a moment alone to consider potential risks your project might run into, their probability and potential implications for the overall health of the project. Whatever happens, you need to have a plan B in case something doesn’t go as planned (project costs, schedule, scope, stakeholders, etc.).
Investigate stakeholders. Big or small, stakeholders you are not aware of can be a major bottleneck in your projects. They create dependencies, increase project risks, and can blow your project budget through the roof if you fail to include them in your planning. Want it or not, a blind spot like this can escalate into a major issue if someone critical to the project, like a single resource you’re heavily reliant on, suddenly becomes unavailable and you have no eligible replacement in sight.
Sleep on it. Budget planning hates haste, it’s a breeding ground for miscalculations, errors, and blind spots. Taking a step back and reevaluating or even recalculating your budget is a sure way to eliminate potential mistakes.
Guesstimating the budget. Project budgeting tolerates no guesstimates. Your ultimate goal should be to get as close to accurate planning as possible, whether that means having to look into historical project data, calculate each future hour worked on the project, or look into the taxation system in your location. It’s not only about getting stakeholder and investor buy-in at the beginning of the project, but also about timely project delivery and overall reputation it will build for you in the end.
Poor budgeting strategy. As you have already seen above, there are lots of budgeting methods and strategies you can try, but it’s never a good idea to put all your eggs in one basket and fully rely on a single methodology. For one thing, it might lead to budgeting errors and blind spots. For example, if you do the top-down estimation alone, there will be a lot of gaps on minor expenses that can add up and derail the budget. Ultimately, it’s best to go for a more comprehensive, albeit a more time-consuming strategy, or even better — a combination of several of them.
No contingency reserves. This is your money for a rainy day or for when something unexpected happens. It’s great if you never need to use it and end up delivering the project for less money and same quality. But more often than not, something will happen for you to look into that piggy bank. Not including that money reserve into your budget will make your planning not as thorough.
Not tracking spendings. Project budget is never a one-off thing where you create it and leave it be until the end of the project. In fact, not tracking project spendings can result in your project running over budget before you complete it, which can end in two possible outcomes, both bad: you will need to ask for more project funding or if that’s not an option, the project will stop dead in its tracks.
Unrealistic budget. With the mistakes mentioned above, coupled with too much enthusiasm to impress the potential customer or investor, your decisions can backfire and lead to you creating an unrealistic budget which can do nothing other than upsetting everyone’s expectations. As such, this is an unsustainable business model which will make it difficult for you to successfully land and complete new projects in the future.
Now that you know the ins and outs of creating a project budget, go ahead and use your freshly acquired knowledge. Look back at a similar project and total the tasks, resources, and costs on a piece of paper. Or try a project management software like Runn to spare yourself the effort. In fact, you can take Runn for a spin right now by starting a free trial ➡️
The last thing I want you to remember is this: don't be intimidated by having to create a project budget. There's a reason why best practices and processes are popular - it's because they work for people, and they work consistently. If you stick to methods that have a track record of success, you'll be far more likely to enjoy success yourself.
So, follow the information in this guide, keep good records, and make sure that documentation is always up to date with the necessary detail. You'll grow your project budgeting confidence in no time.
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