How to manage a project budget, a step-by-step guide
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All projects involve costs, no matter how large or small they are. Alongside completing a project on time and keeping to the scope of the task, keeping to the set budget is a key element of good project management. If you're looking for ways to keep your project within the allocated budget, it can be useful to follow a plan. In this article, we discover how to manage a project budget, find out how to avoid an overrun and reveal actionable steps you can take to bring your project in on budget.
What is a project budget?
Before discovering how to manage a project budget, it's useful to define exactly what a project budget is. A project budget is the estimate of the entire cost of completing each task and activity that makes up the project. This establishes expectations and is critical to deciding whether to go ahead with a proposal or not. Most budgets contain all of the costs associated with running the project. These generally include:
Labour costs: Including wages, payroll taxes, benefits and expenses.
Procurement costs: Including the costs of acquiring goods, services, software, transportation and equipment from external suppliers.
Research and consultancy fees: These are the costs associated with specialists or legal fees.
Training: Including the costs of courses, workshops, conferences and expert tuition.
You can then divide these into two categories:
Fixed costs: For example, a certain item that is a fixed price and which doesn't change.
Variable costs: These are costs that may vary. For example, a contractor gives you an hourly rate and then the job takes longer than he expected. It's important to monitor these variable costs to ensure you don't go over budget.
How to manage a project budget
Reliable budget management is an important aspect of planning a successful project. The following steps can help you to get your project budget off to a great start:
1. Spend time outlining the project tasks
Before you can calculate your costs, spend time thinking about each task and how you're going to accomplish them. Study your plan and identify important stages and steps that your team are going to complete. Discuss this with all stakeholders so you're all working with the same criteria.
If you're working as part of a team, it's a good idea to use a file-sharing document so you can all add your ideas and contributions. At this stage, you're making a list of all your costs, rather than setting an actual budget. This process can help you identify details that some may overlook.
2. Make an estimate
Now it's time to start estimating how much the entire project is going to cost. You can do this either with a top-down or a bottom-up approach, as follows:
Top-down budgeting: This provides a total amount for the budget and divides it into smaller tasks and activities.
Bottom-up budgeting: This estimates the price for each task and then adds them together to discover the entire cost.
Choose a technique to estimate the cost of each task and on your project budget document, create a column to note the estimated cost of each task. Ensure you use the most up to date figures you have and make a note of anything that might affect the accuracy of your estimate.
3. Finalise your project budget
Once you have a clear estimate, you can finalise it with other members of your team and stakeholders. This is a good way of asking for feedback about specific tasks and costs within your budget and can help avoid any surprises. Successful budget management is about tracking your resources and reacting quickly to any new demands for funds.
4. Track any changes
You may consider using budget tracking software to keep abreast of notable changes. A budget tracker can inform you when things evolve or fluctuate. Within your schedule, you can add columns to keep a note of the estimated costs compared with the actual costs, in addition to other important data. This produces a real-time budget that is easy to keep a track of. It may be sensible to add controls on your budget tracker within shared documents so that only those with approved access can see or change the budget.
5. Monitor your budget regularly
It's important to monitor your project budget frequently. Analyse carefully and update it where necessary. By comparing actual costs with your estimate, you can avoid spending more than you intend. If it looks as if you may go over budget, you can then cut down the amount you're spending before you jeopardise the whole project.
One of the main reasons that projects go over budget is because the project loses focus and you start to spend on tasks that weren't in the original plan. At the same time, it's a good idea to factor in some extra money for unexpected changes so you remain open to new opportunities and can broaden the scope of your project without fearing that it may not work out.
6. Keep the project on budget with automation
One of the main roles of a project manager is to ensure the project sticks to the budget as closely as possible. Usually, the budget stays fixed, unless the scope of the project changes or there's some other business reason for a drastic change. It's a good idea to automate your budget management as far as possible. For example, if employees file their expenses as soon as possible, this makes it easier to know in real-time whether you're likely to go over budget.
Ask everyone involved for input so you can keep track of spending. If you then wish to adjust costs, you can inform team members or stakeholders and change your document so it's up to date.
What's the purpose of a project budget?
The project budget helps with decision-making and can make or break a potential idea. It helps you decide how much to spend on the various components of the project and lets others know how much money you're going to require if you decide to go ahead with the scheme.
A project budget also gives the project manager a base to work with. They can then plan whether to continue with the idea or whether they're going to require more money to see it through. As a project manager, the more detail you have, the greater your understanding of how the project can progress. Details give you a more accurate picture.
Tips for better project budgeting
Good project management is about identifying when the project may be in danger of going over budget and steering it back towards the intended budget. Here are some ways you can better manage your project budget:
1. Try to estimate your costs accurately
It's crucial to provide accurate cost estimates to create an overall picture. Try to obtain estimates from more than one supplier. Ensure you don't underestimate how much each task is going to cost.
2. Break the project down into small steps
To understand the full complexity of the job, it's useful to compartmentalise your project. Divide your project into small bite-sized tasks. Then examine each of these elements so you can be sure you haven't missed anything important.
3. Avoid scope creep
Scope creep is where the project loses focus and starts encompassing all sorts of additional goals. New plans and ideas are going to require extra funds. It's important to watch out for any signs of scope creep and to keep the focus on your original project.
4. Set up an effective project schedule
Unexpected costs associated with wages, expenses and expert fees are some of the most common reasons why a project may go over budget. If a deadline slides, your budget may be in danger. The key is to set up an effective project schedule to manage your timeline and to keep monitoring human resources.
5. Expect the unexpected
It's impossible to plan for every eventuality so it's essential to have a contingency in place. Make a backup plan so you know what to do when something unexpected happens. If you plan for the unexpected you can be ready if things don't work out as you hope.
6. Take advice
If you haven't managed a project budget before, there are plenty of resources that can help you. Sometimes a project goes over budget because the project manager lacks experience. You may be able to find help from senior management, a mentor or a business network.
Methods for avoiding a budget overrun
Being over budget isn't ideal, but there are ways to reduce your expenses. You may consider:
Offsetting costs: You may be able to offset the costs of one task by reducing the expenses of something else.
Swapping resources: You may find that you can reduce costs by supplementing cheaper options. For example, rather than bringing in an expert for a workshop, use online courses.
Increasing your budget: It may be possible to ask for more funds, especially if the project is nearly complete and you only require a few more resources to finish it.
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