Your 2023 project planning is likely underway — and perhaps the most important part of project management is carving out your budget plan.
Your project team members won’t have the necessary resources they need if you can’t secure the right funding. And if you don’t have a set plan from the start, you run the risk of joining the 57% of companies who say they don’t typically complete their projects within the established budget.
Since project budget management is so crucial to the success of your business, it’s important to fully understand what a project budget is and what the steps are to building a budget that takes your project execution from good to great.
What is a project budget?
A project budget is the combined cost estimate of all project tasks and milestones that need to be completed over a defined period of time in order for your project to be successful. You’ll use it to define the resources your team will require for each phase of the project.
A few line items that will make up your project budget include:
- Labor costs
- Material expenses
- Operational costs
- Task duration
- Total budget estimation
It’s important to note that this is not a static plan, but rather one that you should review and update regularly when inevitable changes occur — like the dreaded scope creep.
Why do you need a project budget plan?
Creating a project budget plan helps you stay ahead of the curve. It allows you to identify how much your execution process will likely cost, and gives your project team the ability to ensure they’re sticking to the set budget.
Estimating and controlling project costs
Your project budget approximates how much it will cost to finish the project within the right amount of time. Without regulating the required resources for each phase, you have a higher likelihood of exceeding your original cost projections — especially if you’re dealing with a complex project. A well-laid plan makes it much easier to manage project expenses and prepare for any potential risks.
Providing a ballpark estimate of the required costs for all phases of your project makes it easier to communicate to stakeholders what you need to complete the job. It gives them a comprehensive resource to use when deciding if the project makes sense to move forward with.
Prioritizing your project schedule
Businesses that put an effective strategy behind project prioritization deliver 40% more value, according to management consulting firm McKinsey and Company. A project budget plan helps you align resources to jobs that need to be completed sooner than others and helps you build your calendar in a more thoughtful way.
Project budget planning approaches
There are several methods you can use to estimate project costs:
This method involves working as a team to examine each project task at the most granular level, putting all the information together, and laying out an overall budget that you delegate to team members.
Tip: It’s best to use this approach when you have a well-defined project that includes every nitty-gritty detail.
Bottom-up estimating is a popular technique for many reasons. It helps you and your entire team create a more accurate project scope by providing a clearer picture of every component. It also reduces overall risk because you are able to anticipate challenges that may potentially block your roadmap.
Top-down estimating works exactly like it sounds — you evaluate your project scope as a whole, identify the large elements of work, and break it down into smaller components. With this approach, you don’t need to define the details as part of the budgeting process. Instead, you can use data from previous or similar projects to estimate the potential cost.
Compared to the bottom-up technique, the estimates are established by experienced managers instead of using the team as a whole.
Tip: If you have a clear direction in place and your team is on the same page about how the project aligns with company goals, this method might be right for you.
Analogous estimating for your project requires you to look at data from similar jobs you’ve completed in the past to determine a cost estimate. This method comes in handy when you have limited information about the upcoming project.
Because your estimation is solely based on the comparison to previous projects, the accuracy depends on the amount of data you have. Using a project management software like Harvest makes this technique much easier. With Harvest, you can keep track of internal costs and review past project data to inform future project scope and estimates.
Steps to creating a project budget plan
After choosing which budget method you’d like to use, use the following steps to build the best project budget plan for your team.
1. Look at past project data
Regardless of which method you choose, the best way to get a headstart on your project budget plan is to look back at how your budgets performed in similar projects. Reviewing what worked (and what didn’t) will give you a better chance of forming a more accurate estimate.
As mentioned before, Harvest is a great tool for doing this. By tracking time and expenses in Harvest, you capture critical project data that allows you to learn from the past, keep current projects on track, and better estimate future projects.
2. Break down the project
Compile all the tasks in your project into a list and estimate how much each activity will cost to execute on the deliverables. The tasks will vary depending on what type of project it is, but they can include things like design needs, labor cost, material resources, and research expenses.
Note: Harvest lets you assign a cost rate to each person on your team, so you can track your costs while they track their time.
3. Add it all together
Add the cost of each task defined in the previous step together to get the total amount. This can be done quickly and easily if you set up a spreadsheet with two columns: tasks and costs.
Tip: Be sure to have someone else take a look to ensure accuracy.
4. Add contingency and taxes
A contingency is essentially an emergency fund that you should structure into your budget for unexpected occurrences or errors. A good rule of thumb is to factor in 10% of the total you calculated in the previous step.
Tip: If taxes aren’t already included in your individual line items, don’t forget to include them in your estimate. Once all these are included, your project budget plan is complete.
5. Revisit often
Real-time project changes can impact your budget, so be sure to review your budget on a regular basis to ensure everything is still on track. It’s helpful to take a look at the numbers on a weekly basis so you can update the plan sooner rather than later.
Project budget checklist
As you build your project budget plans for 2023, be sure to ask yourself the following questions:
- Is the project defined and does it have an end goal?
- What constraints and ground rules should I consider?
- Do I have a reliable source of data to rely on?
- Am I using the right estimating technique?
- Are the owners of each task defined?
- Do I have rates for all the required resources?
- Is there a best practices industry standard to compare my plan against?
- Do I have enough in my contingency fund?
- Are the stakeholders aligned with our goals?
- Can I reconcile any differences between the final budget and the original estimates?
Building project budget plans is done most successfully when you have the right technology behind you — and Harvest is here to help.
Our comprehensive tool provides visibility into the key aspects of your projects — budget, team capacity, and costs — enabling you to keep everything on time and on budget. You’ll get clear visual reports that allow you to compare actual time vs. budget, more accurate timesheet and cost data, and the ability to pinpoint which tasks are impacting costs the most.
Get started with a free trial today to see how easy it is to help your team thrive with intuitive time tracking and powerful insights.