Ensuring a project stays within budget is one of a project manager’s most important responsibilities. While the idea of creating and managing a project budget might seem intimidating or complicated at first, experienced project managers know that this is a critical skill when it comes to achieving business goals and keeping stakeholders satisfied.
In this post, you’ll get an introduction to project budgets, learn why they’re important, and get a step-by-step guide to creating your own. Plus, keep scrolling for a free project budget template that’ll make your work even easier.
What is a project budget?
A project budget is a detailed, dynamic document that outlines the total expected costs associated with the successful completion of any project. The key purpose of the project budget is to help project managers, stakeholders, and any relevant senior leaders understand the total costs of the project before and during its completion. A thorough project budget will include costs associated with materials, labor, and any other operational costs.
The project budget will be created by a project manager, but reviewed and updated as needed with input from other members of the organization over time. It can be divided up into different phases of the overall project, or created and presented as inclusive of the project from start to finish.
Why is a project budget important?
If you’ve ever been a part of a holiday gift exchange where no spending limits were set, you know the chaos that a lack of budget can cause. Without designated parameters, it’s much too easy to spend money without much thought or attention.
A project budget ensures that all individuals and teams involved know upfront how much a project is going to cost. Not only that, but this process is absolutely crucial when it comes to receiving approvals, funding, and buy-in from team leads and other stakeholders. This important document shows where financial resources are needed and gives stakeholders the opportunity to tweak their strategy if needed.
Additionally, a project budget helps set and manage expectations among stakeholders and those carrying out the work of the project. For example, there will usually be a significant difference in the quality of a project that was completed for $100,000 compared to $1,000. In seeing the total estimated project costs and allocated budget, team members and stakeholders can understand what to expect when it comes to the final deliverables.
Here, a project budget can also provide a baseline to measure results and make future data-driven decisions. When a senior leader, stakeholder, or project manager compares the quality of two projects with varying budgets, they’re able to analyze and establish the components of each one to determine where ROI was highest. They might find that it was worth the money to hire an external agency when it came to video production, but that the budget allocated to paid ads didn’t get the results they had hoped for. As they plan future initiatives, the team can use this data to craft more focused strategies and maximize the impact of their project’s budget.
While you may not think going over budget a little is a big deal, every dollar counts when it comes to a business’s overall finances. When you don’t have a project budget, it’s obviously much more likely that the organization will overspend on areas that don’t require such significant financial resources.
You can also think of a project budget as a type of plan. Having a set budget gives you another metric you can use to measure a project’s progress. For example, if your graphic design costs for a three-month project are estimated at $15,000 and you’ve already spent $13,000 after two months, you can recognize that things might be veering off-course and require redirection.
A step-by-step guide to creating a project budget
Now that you know exactly why a project budget is so important, time to find out how you can create your own. Here’s a step-by-step breakdown to help you with every step of this process.
Step 1: Identify the project’s scope and timeline
The first step in creating an effective project budget is to figure out the estimated work needed to complete it and a reasonable timeline. Both of these factors will have an impact on the overall project budget.
For example, if a stakeholder wants a short email nurture sequence written and has a flexible deadline, you probably won’t need to factor in the hiring of an external contractor into the project budget. However, if a stakeholder needs a large advertising campaign with a tight deadline, you’ll need to factor in the cost of external contractors, including any additional fees they may request for a quick turnaround.
A best practice when in the first stages of developing your budget is to conduct a Work Breakdown Structure (WBS). Defined as “a hierarchical breakdown of all deliverables required for a project to be considered complete,” a WBS is often the baseline for any project budget. This helps you understand every deliverable your team will need to create and the elements of your project that will impact your budget.
Step 2: Establish costs and resources
Once you know the scope and timeline, it’s time to fill out your project budget document with estimated costs. List all the resources you will need in detail, like staffing, materials, equipment, marketing, and any extra foreseeable expenses. Then, assign a projected cost to each component.
You can start by referencing data from previous projects to establish an accurate cost projection. Review the budgets and total cost breakdowns of similar projects the organization has completed in the past, and use this information to build your budget. Take into account any possible fluctuations to costs, such as inflation or rate and individual contributor salary increases, in order to get the most precise estimate possible.
You can also take a look back at any wins and opportunities or lessons learned from project retrospectives in order to understand the roadblocks that took place over the course of past projects. For example, if a timeline was significantly extended because of a lack of resources, you can take that information and account for it in the new project budget.
Step 3: Build your project budget and review it
Now that you’ve defined your resources and established costs, you can build your actual project budget. Organize your information in a way that makes sense (such as grouping similar components together) and add any notes that provide additional context next to each line item. This will be especially helpful when you look back on this project budget in order to inform future budgets.
Once you’re satisfied with your project budget, take the time to review it with other teammates and experts within your organization. Others may notice any missing components you might have overlooked, or give you a more accurate estimate for certain costs. For example, asking your team’s art director about the hourly rates for a freelance graphic designer will give you a much more realistic number than simply referring to a salary website. By seeking reviews for your project budget, you limit the likelihood of mistakes or oversights.
Step 4: Get approvals
After you’ve filled out your project budget document and had it reviewed by a team member, it’s ready to be brought to stakeholders and senior leaders for approval.
As these key individuals have the final say over the budget, you will need to be prepared to explain your thought process when it comes to the costs you’ve outlined. It’s also important to present any assumptions you’re making for each component of your prepared project budget.
As soon as your project budget is approved, you’re able to take full ownership. This is a project manager’s responsibility, so you’ll want to keep a close eye on costs, deliverables, and timelines to ensure everything is on track.
Project budget template
Now that you understand how to create a project budget, you can use this free template to draft up your own. Just click the link to access the template and download it. Once you open it in Google Sheets you’ll be able to edit it and input your own values and data.
Make every dollar count
Building an effective project budget can be difficult even for the most seasoned project managers. From ever-changing labor costs to stakeholder management, there are numerous moving parts when it comes to developing and managing a project budget. By using the guide above along with our free template, you’ll be able to provide a transparent breakdown of costs for stakeholders and business owners, keep your project on track, and make the most of your budget.
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