A project budget is part of a comprehensive project management plan – a tool for seeing a project from initiation to completion. Project budgeting is the process of determining the total amount of money available for a project and assigning estimated dollar amounts to line items, and then managing costs throughout every phase.
A “project” means different things to different businesses. It may be based on construction, a marketing campaign or a store expansion, for example. Regardless, a project budget is a must. Let’s look at the essentials of creating and maintaining a budget for most types of projects.
Select the Right Planning and Budgeting Tool
Some people swear by project management applications, such as Microsoft Project, Smartsheet or Zoho, where others prefer spreadsheets. You’re in for a learning curve if you haven’t used a project management application in the past, but they do provide near-seamless update capabilities. When you change a dollar amount or resource here, the software trickles those changes throughout the plan. You also get great visuals, dashboards and reporting (such as Gantt charts), which the software generates automatically or with just a few clicks on your part.
In contrast, spreadsheets tend to require a lot of manual updates, and it’s easy to outgrow a spreadsheet quickly if the project is even moderately complex. But they’re relatively simple to use. You might be able to find a decent Excel template on Office.com that serves your needs. You should also browse the templates at OfficeTimeline.com or search the Internet for “project management spreadsheet template.”
Create a Timeline
Every project has a start date and an estimated or target end date. To ensure you can track a project properly, stay on schedule and remain within budget, you need to list all deliverables and/or milestones, assigning due dates to each one. A timeline lets you see where you are at a glance and zero in on milestones that may be slipping.
Account for Resources
Some projects are so small only you or an employee are involved. More often, you will have multiple people who are responsible for various tasks. Define each person’s role and responsibilities, and include that information in the project plan along with their contact information.
You also need to list all equipment, hardware, software, materials, supplies, storage space (whether physical space for durable goods or digital storage for files) and travel costs required for the project. It’s important to spend time thinking through the project to anticipate the resources you’ll need, and keep adding to your resource list so it’s as complete as possible.
Add Costs and Create a Budget
Here’s where the meat of project budgeting begins. List costs for each person, which are called direct labor costs. This includes each person’s rate, the time you estimate they will spend on the project and the total dollar amount. Then review your list of non-labor resources. If you must purchase or lease these types of resources for the project, research the costs and get quotes so your estimates are accurate from the start.
At this point you can calculate an overall budget if it wasn’t established from the outset, such as part of a Request for Proposal (RFP). To ensure a profit, your actual costs must be lower than the overall budget. There are a few ways to accomplish this, mainly with multipliers and/or contingencies.
A multiplier is a number of your choosing that you apply to estimated costs to reach a budgeted cost. Multipliers vary greatly among businesses, projects and even line items in many cases. One method is to apply a flat multiplier, such as 1.5 or 10, to each line item. The budgeted amount would then be 1.5 times (or 10) the estimated cost.
A contingency is usually a separate line item with a cost assigned, which is a surplus fund of sorts to cover unexpected expenses. It’s not uncommon to see a 15% contingency line item applied to an overall budget.
Monitor Costs and Update the Budget
Once a project is underway, regularly update actual costs and review the budget for each item to determine whether you’re nearing or exceeding any thresholds. I personally set thresholds at 70% of budget. That means if a part of the project is nearing 70% of budget and I’m only 50% of the way to completion, I notify the project owner (or assess the situation if I’m the project owner).
In this case, you or the project owner may need to perform risk analysis to determine next steps. Risk analysis helps you determine your options if something goes wrong with the project. For example, an unexpected schedule slow-down or late milestone payment doesn’t have to mean the end of the project. You might be able to share the risk (by bringing in a consultant or partner) or control the risk (through additional testing or short-term financing).
Whether a project is fairly easy to track and manage or complex in nature, project budgeting is necessary from start to finish. It also helps you determine when you need to resort to “Plan B” to keep a project from ending unsuccessfully. Although it’s exceedingly difficult to estimate every cost at the beginning of a project, smart budgeting with adequate multipliers or contingencies will help ensure you make the profit you deserve. Good luck with your future project!