No matter the scope of a project, a project budget is a must if you want to keep costs under control, meet deadlines, and produce high quality deliverables. Building an accurate project budget can be a serious challenge, especially as projects increase in size. Accounting for all the variables that go into an enterprise-scale project — whether it involves your organization’s latest refining endeavor or a brand-new infrastructure initiative — is a colossal endeavor. But with the right process and tools, you can build an accurate budget that sets your project on the path to success, ensuring the right resources are available at the right time.
What is a project budget?
A project budget is a detailed plan that outlines the anticipated costs required to complete all tasks associated with the project. Developing accurate project budgets allows your organization to better manage project scope, allocate necessary funding — including contingency funds — and more easily assess project progress. It’s important to continually review project budgets to see how your team is performing and ensure you’re hitting your targets.
The days of creating budgets with a clunky spreadsheet are gone. Modern project budgeting tools make it easy to assess performance, dynamically adjust budgets, and better estimate contingency requirements. They integrate with your other project processes, leveraging data on plans, progress, and actuals across your organization to develop advanced, reliable forecasts.
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Benefits of good project budgeting
Every organization wants to complete its projects under budget, but that’s easier said than done. Only 43% of companies typically complete their projects on budget. Developing an accurate budget helps your organization keep costs under control through effective planning and resource allocation. A project budget serves as a key benchmark throughout the entire project lifecycle, enabling effective change management by establishing a realistic baseline for costs. In short, effective project budgeting is one of the most important contributors to project success and a powerful tool for improving profitability across the organization.
6 steps to creating a project budget – with examples
Here are six straightforward steps to get you started on creating a great project budget.
1. Define project goals and scope
Before you can really dive into creating your project budget, you need to clearly define your goals and the scope of the project. Project scope includes everything needed to bring a project to a successful conclusion, from tasks, to schedules, to costs. Defining project scope is a critical requirement for project success and developing a budget — after all, you can’t effectively tally expenses if you don’t know exactly what a project entails.
Beyond enabling the budgeting process, a clear project scope has several other benefits. The risk of scope creep — the risk that a project will expand to include items that weren’t originally anticipated — is lessened when there’s agreement in advance among all stakeholders on important aspects like timelines, required resources, and end goals. A well-defined project scope also serves as a guide for managers and other team members as they schedule, assign, and complete tasks throughout the project lifecycle.
2. Identify necessary resources
Once your scope is clearly defined, you’re ready to identify the resources you’ll need to complete your project. Understanding what resources your project requires, from mining equipment to necessary subcontractors, is a foundational requirement of project budgeting. Of course, resource allocation involves more than just tons of steel and man-hours. Great resource management will result in a detailed plan for which workers will do which jobs on which days. You’ll also want to determine which resources are likely to have static costs and which may fluctuate over the course of the project.
3. Estimate costs
Next, it’s time to estimate costs, calculating the expenses for the necessary resources you’ve identified. Note that estimation is distinct from actually building your budget, which involves associating estimates with specific parts of the project. Estimating how large your contingency fund should be is also an important part of this process. Inaccurate estimates are the bane of many a project budget. If your estimates — and, by extension, your budget baseline — are off base, your entire project is based on faulty assumptions.
The required resources you’ve identified are the first part of developing on-point cost estimates. You’ll also want to pull in other key data points like the price of each identified resource, relevant historical information, how long you’ll need to use each resource, and any assumptions and risks involved. An integrated project cost estimating platform makes collecting, analyzing, and building estimates from all this data much simpler.
4. Create the project budget
Once you have the costs mapped out for each granular aspect of your project, you’re ready to make your actual project budget. You’ll be putting together the costs you’ve estimated together with the tasks and timeframes associated with each. This should result in an accurate, comprehensive budget baseline. With the help of your project budgeting and forecasting tool, the budget should take the form of an online database you can update at any time based on changing trends and new data.
5. Incorporate feedback and get the budget approved
It would be great if the first draft of every project budget were perfect, but odds are there are ways you could tweak it to make it more robust and accurate. Although you may be able to identify some areas for improvement yourself, getting a set of diverse perspectives on the initial budget helps cover any blindspots. Incorporating feedback on the budget from a variety of stakeholders involved with the project also gets everyone on the same page before the project kicks off. And the support of everyone involved is invaluable when it comes time to get formal approval of the budget alongside any associated contracts or scopes of work.
6. Track costs during the project lifecycle
Once the project has officially begun, your budget becomes one of the primary tools for tracking progress. Reference your budget baseline frequently and see if your estimates match up to reality. If they don’t, your contingency fund will hopefully cover any shortfalls. This is a key reason to take funding limits seriously before your project kicks off: if your organization simply lacks the funds to cover a revised budget, you’ll have to live with what you originally allocated. This may lead to the need for ad hoc scope reduction, with the risk of producing deliverables no one is satisfied with.
Effective change management is the key to handling whatever comes your way while minimizing any impact on your project budget. A change management plan will lay out what processes team members should follow if and when specific changes arise, who is responsible for handling various types of changes, and how to best communicate change to relevant team members. If you’re a contractor, a strong change management process also helps identify whether contributing to budget overages is your own responsibility or the customer’s. This additional clarity regarding contractual obligations makes it easier to avoid disputes and legal claims.
Project budgeting best practices
Now that you know the steps to follow when putting together your next project budget, let’s cover a few strategies you can put into practice to improve the process.
Keep the budget updated in real time
Even the best-laid plans can go awry, so it’s important to track project progress and spending while updating your budget in real time. Opportunities to increase efficiency and further reduce expenses can present themselves as the project moves forward, and unaccounted-for risks can impact even the most carefully built budgets. To handle these unexpected costs — or unexpected savings — you should employ effective project controls. These are processes for collecting and analyzing data to help control key aspects of your project, including costs. They’re the best way to effectively measure the current state of your project and forecast where its schedule and costs are likely to go.
Account for project risks
Every project comes with some amount of risk. There are endless factors that can make or break a project, many of which are out of your organization’s control. New regulations can pop up mid-project, weather can be uncooperative, vendors can be unreliable, supply chains can break down, and equipment can malfunction. But with project risk management, planning for these possibilities can help ensure your project finishes smoothly despite any hiccups that arise.
Consider resource availability
You may have an excellent grasp of the resources and materials you’ll need to get your project to the finish line, but that won’t matter unless those resources are actually available. Supply chains and labor markets can change over time, sometimes unexpectedly. It’s important to incorporate any expected changes in resource availability into the budget, as well as contingency plans so that surprise shortfalls don’t derail the project.
Simplify project budgeting with EcoSys
Effective project budgeting underpins any successful approach to project management. It’s a must for ensuring projects are completed on time and within budget. Allocating the right resources to the right people at the right time also empowers everyone involved to do their best work, keeping team members happy — along with your customers.
EcoSys is an enterprise project performance solution that enables more accurate forecasting and budgeting, helping your company measure and control project costs. EcoSys keeps every step of the project budgeting process in the same place and integrates it with other key building blocks of project portfolio management, like resource planning and risk management. It also integrates with external systems like your ERP finance module to leverage important data like actual expenses, avoid duplication of work, and feed automated processes for forecasting and performance measurement. Keeping your data and projects within an integrated system is the best way to make each new project better than the last.
Contact EcoSys today to schedule a custom demo and see how it can elevate project budgeting at your organization.