What is a project budget?

A project budget doesn’t just involve calculating the overall costs of a project. Rather, it involves breaking your project down into different tasks, and their costs. If you’re working on a one-off project, you may look at hiring freelance or temporary workers on a contract.

You might break down tasks into who you need to hire in order to complete them, and how much commission you’ll need to pay them. Or instead, you may look at what inventory and supplies you’ll need in order to complete particular tasks, and whether you need to invest in any additional staff training so that they can complete it successfully. 

Project budgets are useful regardless of which industry you’re in. Whether this is in the construction industry, or on a marketing campaign, they can help you communicate with your stakeholders about how much funding you’ll need in order to successfully achieve your end goal. 

Staying within a project budget

While a project budget is a good way to calculate costs of hiring staff, stocking the right supplies, and equipment, it also helps you to measure how easily you’re able to meet these targets. As you move through different stages of a project, you’ll be able to see just how easy it is to meet the budget targets you’ve set. You can keep track of how much you’re spending step-by-step, helping you to prepare for any potential bottlenecks. If you can spot any potential areas which may be a drain to your budget, you can plan in advance to stop these from being so much of an issue.

Different types of project budget

There are different types of project budget which can help you manage the costs of your project. You may find that some ways of managing a project’s budget are better suited to the type of project you’re looking to complete. These four approaches are known as:

• Analogous
• Parametric
• Top-down
• Bottom-up

Analogous

If you find that you have little data available on how much your project will cost, then an analogous technique may help you to estimate this. You can do this by taking historical data that you do have on similar previous projects (in terms of cost and duration).

While this technique may be useful if you are working with new projects which are similar in scope to those you’ve worked on before, it’s less relevant if the project you’re working on is markedly different in scope.

Analogous project budgeting also does not account for inflation, or any other factors which may affect the overall cost of a project which may look similar to those you’ve completed before.

Parametric

Parametric project budgeting is another way to estimate your project’s budget, helping you to find out how much time, resources, and funding it’ll require. You’ll start with small parameter for task completion. For example, it may take a minute for a construction worker to lay one brick, and you can extrapolate from that information that it could take on average, an hour for them to lay 60 bricks.

You can calculate the starting parameter using historical data on previous jobs, either completed by other similar businesses in your industry, or previous jobs you’ve employed workers on before. As you’re using historical data again for this estimation, you’ll need to factor in inflation. 

Some agencies may help you to work out your parameters using statistics for benchmarking. Parametric estimations are most useful if you are working on a small project, as it can become more complicated (and open to human error) if you try to apply this to larger-scale projects.

That is because you’ll likely need to use algorithms in order to make estimations for large projects, which may be affected by minor miscalculations.

Top-down

The third solution to project budget estimating is ‘top-down’ estimating, and it is technically a form of analogous estimating. It involves a project manager deciding on an overall figure for a project’s entire cost. This figure is based on historical data about how much a similar project originally cost.

Usually, this figure is provided by an expert in the industry or managers who have a history of estimating accurate budget figures. The ‘top-down’ technique is quick and easy for generating results; however, you will have to look at factors which may affect the overall figure, such as inflation. 

Bottom-up

‘Bottom-up’ estimating involves giving each department the ability to set their own budget for the part of the project they’re handling. This means that the senior management for that department estimates a figure, backed up with an expenses list including any cost projections.

‘Bottom-up’ estimating enables different departments to discuss their required budget, before the overall budget for the project is decided upon.

This requires making sure that you’ve identified and reached out to all the departments in your workplace, and instruct them how to present their projected costs, This list could include employee wages for the project’s duration, inventory, hiring equipment, and any other possible expenses.

As you can see, different estimation approaches afford different levels of granularity when it comes to deciding on a budget. What option works for you will depend on how quickly you’ll need a project to be completed, what historical data is available to you on similar projects, and whether it’s more effective for different departments to collaborate on estimating a budget together.

What is the difference between a project estimate and a project budget?

While these two terms may sound similar, it’s important to differentiate between project estimate and project budget. A project estimate is your original calculation of how much your project will potentially cost according to your calculations.

You’ll also need to create a budget proposal on the basis of estimated costs, in order to present to stakeholders who can either approve or reject the figure. A budget proposal is usually based on the final estimate that you are able to come up with. Finally, a project budget is the actual cost of a project, 

Step-by-step process for creating a project budget template

While knowing the different estimation methods is important, the actual process of building a budget requires a systematic approach. A project budget is a living document and is detailed enough to guide spending while remaining flexible enough to adapt to changes. Follow these five comprehensive steps to build your budget:

1. Research and harvest historical data

Don’t start from scratch. The most accurate budgets are built on the foundation of what has happened before.

• Identify similar projects: look for past initiatives that match your current project in scope, duration and complexity.

• Analyse actual vs estimated costs: don’t just look at what was planned for those projects, look at what was actually spent. This reveals where previous teams underestimated costs.

• Gather resource rates: Collect the ‘going rates’ for the talent and tools used previously, adjusting for the fact that these costs may have risen since then.

2. Perform a ‘Lessons Learned’ analysis

A budget isn’t just a list of numbers; it’s a reflection of project strategy. Analyse why previous projects succeeded or failed financially.

• Identify budget leaks: did a previous project go over budget because of ‘scope creep’ (unplanned additions to the project)? Or was it due to external vendor delays?

• Evaluate vendor performance: if a specific supplier consistently charged more than their initial quote, then factor that ‘risk premium’ into your new budget.

• Spot efficiencies: look for areas where previous projects saved money, such as using internal equipment instead of renting, so you can replicate those wins.

3. Consult with subject matter experts (SMEs)

The project manager sees the big picture, but the team on the ground sees the details.

• Interview department heads: if your project requires IT support, ask the IT manager exactly how many hours their team will need. Don’t guess.

• Verify technical requirements: experts can identify ‘hidden’ costs, such as software licences, specialised safety gear or mandatory permits that might not be obvious to a general manager.

• Refine the work breakdown structure (WBS): break the project into the smallest possible tasks and ask the people responsible for them to estimate the cost of each. This ‘bottom-up’ input is the backbone of accuracy.

4. Peer review and error verification

Before presenting your budget to stakeholders, have it pass a rigorous ‘stress test’.

• Check for logic gaps: have a colleague who isn’t involved in the project look over the numbers. They are more likely to spot missing line items or mathematical errors.

• Account for inflation and taxes: this is a common pitfall. Ensure you have factored in the rising cost of materials and any applicable VAT or sales tax that could eat into your margins.

• Verify assumptions: clearly document the assumptions you made (e.g. ‘assuming the price of steel remains at ¨£X per tonne’). If these assumptions change, the budget changes too.

5. Establish a baseline and a contingency plan

The final step is to ‘freeze’ your budget as a baseline, which serves for measuring performance.

• Set the baseline: once approved, this is your point of reference. Any deviations from this number will be tracked as ‘variance’.

• Build in contingency: always include a ‘buffer’ (typically 10 – 15%) to account for the ‘unknown unknowns’. This prevents you from having to ask for more money every time a small issue arises.

• Define a re-baselining process: life happens. Establish a formal process for when and how the budget can be adjusted if the project scope changes significantly. This ensures you aren’t just ‘over budget’, but rather ‘working under a revised, approved plan’.