What is project budgeting?
Project budgeting is the process of estimating how much a project will cost from start to finish. To determine the budget for a project, teams consider the cost of completing each stage of the project, roughly how long it’ll take to complete, and potential roadblocks that could hinder progress.
Budgets are essential because they help set expectations and are also critical to getting the project approved by key stakeholders. A budget also ensures the proper funds are available and helps measure the team’s performance. The document outlining details of the budget should be monitored, updated, and reviewed throughout the project.
Project management software is often used when developing a budget. These tools assist in managing goals and various long-term projects, as well as coordinating the individual tasks that make up a budget.
Approaches to project budgeting
It’s not easy to estimate the size and cost of a project, but there are different approaches to simplify it. These six techniques will improve the accuracy of a project budget and make the entire process more seamless.
- Analogous estimating: Taking the budget data and best practices from past projects to develop an opinion or strategy on how much the current one will cost. Finding the similarities and differences between past and present projects makes this approach possible.
- Three-point estimate: A sensible and pragmatic approach that includes a weighted average based on the worst, best, and most likely budget scenarios. This method forces the project team to consider multiple perspectives when determining a budget, allowing for a more realistic cost estimate.
- Earned value analysis: Estimating the accuracy of a project’s budget while the project is being executed. The team constantly compares the cost of each phase with the previous estimates.
- Parametric estimating: Taking the cost variables and data points from certain parts of related projects and applying them to the current one, allowing the project team to create a budget based on data. Looking at the statistical relationship between common elements makes a project budget more accurate.
- Bottom-up method: Estimating the individual elements of a project, like the milestones, tasks, and phases, and totaling them to get the project cost. This approach is used if a statement of work is being created and the project team knows all project details ahead of time.
- Top-down method: Estimating the project budget total upfront and determining individual elements from there. This approach is best used when there’s a fixed price for the project and the budget is set in stone. Forecasting can be used to have a clear understanding of how each element will affect the price.
Basic elements of project budgeting
There are specific elements and costs associated with narrowing down a project budget. Generally, these elements are:
- Labor costs: Factoring in what it’ll cost an employee to complete the project, meaning wages, payroll taxes, benefits, and any overheads.
- Material procurement costs: Factoring in the tangible items needed to complete the project, such as supplies, equipment, and various goods.
In addition to these core elements, these costs can be within two comprehensive categories:
- Fixed costs: The budget details established for the project that will not change. A fixed cost example is a price quote from a supplier based on the quantity of a particular item the team will need to complete the project.
- Variable costs: The budget details that could change based on activity. A variable cost example is a freelancer agreeing to work on the project for 40 total hours. If the project goes into overtime, the cost will increase.
Benefits of project budgeting
When the project team takes the time to estimate the budget and associated costs, it can lead to many benefits. Keep these benefits in mind when unsure if project budgeting is worth it to the team.
- Secures project funding: Project budgets present insights that stakeholders want to know regarding exactly how much money is necessary upfront to secure the project before it begins. It also details when the money is needed.
- Better decision making: Having a budget before a project is officially underway helps determine how much to invest in smaller steps within the project. It can also help an organization determine what other projects to invest in throughout the year.
- Promote future thinking and planning: Knowing the budget for one project can assist in estimating a budget for future projects in the pipeline. Those involved in planning a budget are better set up to be a part of conversations in the future.
Project budgeting best practices
It’s a good idea to keep these best practices in mind as the project team creates a budget. Doing so will help ensure the estimate is as close to the final number as possible.
- Focus on the company’s needs: When creating a budget, remember the bottom line for any project is to help an organization reach its goals and succeed. Knowing how worthwhile a project is to the organization is a step towards improving the budget's accuracy.
- Break the project down into steps and milestones: To accurately estimate the cost of a project, the team will often break it down into smaller steps or milestones. This helps provide an understanding of what is expected or around the corner.
- Add contingency and taxes: It’s always better to be safe than sorry, so to make sure the team doesn’t go over budget, add contingency and taxes to plan for what could change over time. Doing so also helps to ensure the estimate is close to the final budget.
- Keep communication open with stakeholders: Constant communication with the people who have the most benefit from a successful completion is a must when establishing a budget. Key stakeholders can also help make sure the budget is accurate and make potential adjustments to the scope.
- Adapt to changing parameters: Unforeseen situations, events, and scenarios can occur from the time a project is budgeted until it’s complete. Having a plan for this gives the team the flexibility to adapt to change, whether external or internal.
Mara Calvello
Mara Calvello is a Content and Communications Manager at G2. She received her Bachelor of Arts degree from Elmhurst College (now Elmhurst University). Mara writes customer marketing content, while also focusing on social media and communications for G2. She previously wrote content to support our G2 Tea newsletter, as well as categories on artificial intelligence, natural language understanding (NLU), AI code generation, synthetic data, and more. In her spare time, she's out exploring with her rescue dog Zeke or enjoying a good book.
