How to Plan a Project Budget
Here's our expert guide to creating a realistic project budget.
1. Start With Tasks
If you don't have it already, create a list of all the tasks involved in doing your project. Planning your project like this means you'll have a view of exactly what needs to be done. Got the list? Let's move on...
2. Estimate The Cost of Each Task
Now you can work out how much each task is going to cost. There are several ways to estimate the cost of an activity. Here are three of the most common:
Bottom up estimating: starting with the components of each task and then adding them up (in my experience this is the most common way of estimating and it works well across all sorts of tasks).
Expert judgement: using your professional knowledge to work out the cost of a task (best for items like services).
Analogous estimating: using past experience to judge how much the project tasks will cost this time (best for tasks that you have done before and have experience of).
At the end of this step you'll have a price next to each activity.
3. Add Them Up
As you might expect, the next step is to add all of those costs together. This gives you the total planned budget for the project covering the price of every task.
This is often called Budget At Completion, but you might also hear it referred to as your planned budget or your forecasted budget.
4. Add In The Extras
Extras? What extras? Well, the cost of each individual task isn't going to be enough. Trust me, I've been there. You need to add in:
Management reserves: This is a pot of money to use at the discretion of your management. For example, to cover costs that you can't in good faith pass on to the client. If that happens, you can draw on the management reserves to cover it.
Contingency: Contingency costs are used in case your estimates weren't as good as you hoped they would be. These costs are to cover tasks that weren't identified in your first pass of the plan, or those where your assumptions turned out wrong so the price went up. If you don't know how much contingency to add, go with 10%.
Risk response budget: If your company is mature at managing project risk, you might be able to incorporate the risk response budget separately to your main budget. The risk response budget is made up of the money it costs to implement the mitigating actions on your risk register. In other words, the risk response budget is extra cash to help you deal with the things that might go wrong.
Once you've added up your main budget and your extras you've got the total budget for the project.
5. Track and Monitor
You've planned your project budget now. You know how much you anticipate spending on this project. But budgeting is not a one-off activity. You need to track and monitor your spending throughout the project. This lets you see if your estimates are accurate and gives you early warning of tasks that are going to cost more than you planned.
It's easy to do this with project management budgeting tools, like the ones built into ProjectManager.com. If you plan your budget in ProjectManager.com it will alert you when tasks are going over their budget. The dashboards make it quick to identify where you need to act to keep everything on track.
