Creating a Project Budget — A Complete Guide for 2020
A project without a budget is like a bird without wings. Funding translates a project into measurable and meaningful expenditure and budges the project wheel. Creating your project budget is something you start doing during the kickoff phase of the project management process.
If you work in a project-based company as a manager, preparing and running a project budget will most likely be your full responsibility. At first glance, the whole budget thing might seem intimidating, but eventually, you’ll realize that all you need is a detailed plan or a work breakdown structure as your starting point. In this guide, you’ll discover what is included in a project budget and how to calculate one with or without a system to help you.
What is project budgeting?
Let’s define what a project budget is in the first place.
The budget for a project is plainly the combined costs of all activities, tasks, and milestones that the project must fulfill. It can be displayed as a cost plan and should be approved by all the stakeholders involved in the project.
Before jumping to explain how the budget is developed, it’s critical to understand why it’s a significant part of any project.
Why a project budget is important
There are at least two reasons to explain the importance of having a project budget plan.
First, it’s an essential component of project funding. The numbers will help you tell stakeholders exactly how much money is needed to finish the project and when the money is needed to win the deadline. Another reason you need a budget is to actually get people to work, as well as collect all the equipment and materials necessary to deliver a successful project where all expectations are managed.
Second, a well-planned budget provides the basis for project cost control. Having an end estimate of money to be spent helps you measure the project’s actual cost against the approved budget and see how much costs you’ve burned already. It will give you an understanding of how the project is progressing and if any changes need to be made to the plan.
To wrap it up, a project budget is essential for getting the necessary funding and having full oversight of the project to keep it under control. One way to prepare it is to total the estimated cost of every task, activity, or work package. Doing so you’ll have the information to prepare a cost baseline.
Now, when the purpose of a budget in project management is clear, let’s switch to the practical part and actual advice.
Approaches to estimating a project budget
So, where would I begin?
There are different ways to estimate the cost of the project, depending on how your company approaches planning.
Bottom-up estimation
Rate the individual parts of the project plan and tot them up
Bottom-up estimation is one of the best and foolproof ways to prepare a project budget. It anticipates estimating individual parts of the project, such as tasks, milestones, or phases and totaling them to get project cost. This method can be applied if you’re at the point of creating a statement of work.
The obvious benefit of using bottom-up estimation is that you can easily track at which point the project goes over budget. Having an accurate plan and all costs laid out in front of you, you can see the actual progress of the project.
The downside of this approach is that it takes plenty of time to go down to the smallest detail of the project. If you’re sure you know every grain of the project, bottom-up estimating is a go-to. Also, because it’s very granular, at some point you might suffer from inflation affecting the cost of your estimates.
Top-down estimation
Figure out the total, and then split it into tasks or milestones
Top-down estimation is opposite to the bottom-up approach mentioned above. It starts with the project budget total and involves breaking it down into smaller chunks to allocate a number of hours to milestones.
Top-down estimation might be useful to apply in the early phases of a project to figure out if a client provides a sufficient amount of money to deliver a project.
Otherwise, the main disadvantage of this approach is sloppiness when it comes to estimations. The budget can hardly be determined before you understand the scope of work and have a project plan.
Analogous estimation
Analyze the data in similar projects to decide the cost
If you’re not totally new to project management, you’ve probably managed a few projects before and can tell what works and what doesn’t. Using analogous estimation, you would rely on the budget data and best practices from your previous projects to form an opinion about how much the current one could cost the client.
There are always similarities between projects, but it doesn’t mean that you should make decisions based solely on them. Every project is unique. In case you haven’t managed projects before, you can derive data from different external surveys as well, looking for rough figures.
It goes without saying that you can’t rely on analogous estimation, as it is not as accurate as other techniques, like bottom-up estimation. But the advantage of analogous estimating is that it’s super quick and is especially useful when there’s limited information about the project.
Parametric estimation
Using data and project variables to suggest the total
In contrast to analogous estimation, parametric approach is more accurate. It takes cost variables or data points from specific parts of the project similar to the one you run. Applying them to the current project, you take more decisions based on data.
The advantage of this process is that it’s more accurate than the analogous estimation because it employs more than one data set and uses the statistical relationship between historical data and variables.
The disadvantage is that with digital projects it’s often hard to find useful data points.
Three-point estimation
Take the best, worst, and most likely case estimates to do the average
Three-point estimation is one of the most sensible and pragmatic techniques as it takes into account a weighted average based on the best, worst, and most likely case budget scenarios and encourages you to think from multiple perspectives. Thus you can figure out a realistic cost estimation.
The upside of the three-point estimation technique is that you can reduce the risk of going over budget, as it will be indicated in your plan, and eventually deliver on expectations.
There are no substantial disadvantages of three-point estimation. Sometimes it takes longer to create a budget using this approach, but at the end of the day, it’s worth the effort spent.
Check out these Project Estimation Techniques 101 for a more detailed perspective.
How to create a basic project budget in five easy steps
You can use project budgeting methods above, or stick to a simple project budget planning routine. Essentially, these five steps can help you put the finances together and create a project budget summary:
- Break down your project into tasks and milestones. Working with your task list will give you an understanding of what you’ll need to accomplish and help you with project cost management. If you already have a task list, that’s fine, and you can start right off. But if you don’t, start writing down everything that your team needs to do.
- Estimate each element in the task list. Now it’s time to give each element that you’ve written down an optimistic estimation. At this point, identify all the resources and materials you’ll need to perform well and include them into your estimate when calculating the price.
- Add your estimates together. This is probably one of the easiest parts of the project budgeting process, especially if you have a spreadsheet with two columns: Tasks and Costs. Then, you’ll be able to calculate the total fast.
- Add contingency and taxes. Better safe than sorry. Of course, you can’t be 100% confident about the final estimate, as things change all the time. By adding contingency and taxes, you make sure that the project doesn’t go over budget and your estimate number is closer to the final costs you eventually spend. If you don’t know how much contingency to add, project management experts recommend going for 10% of the total.
- Get approval. Talking to your manager to approve project costs would be the last thing in the project budget creation process.
Learn from the experts: The best budgeting practices
Now when you know the basics, it’s time to learn from the experts. We’ve talked to experienced project leaders and researchers and they shared their best practices and things to count in when creating a budget for a project.
*** Continue reading the full article here.
Originally published at https://blog.forecast.it.
