We discussed an important aspect in the project planning phase, the projectschedule, in our last article, where we dive pretty deep into using realistic time estimates to build a solid project plan. In this one, we will be looking at another aspect of the planning phase, the project budget.

A project budget is the estimated monetary resources needed to achieve the project's goals and objectives. These resources usually contain items such as labor, operating costs and costs associated with obtaining necessary materials like hardware, software, or equipment.

The budgeting process usually happens in conjunction with the scheduling process because the steps of the scheduling process are highly dependent on the costs. The total cost needs to be broken down to determine how much has to be spent on different elements of the project.

Key components of a project budget

When creating a budget, you will need to understand stakeholder needs, budget for surplus expenses, maintain adaptability, and review and reforecast throughout the entire project. There are several factors to consider when creating a budget, they are:

Resource cost rates

Resource cost rates means the cost of a resource. Some examples of resources are labor, tools, equipment, materials, and software.

Reserve analysis

A reserve analysis is a method to check for remaining project resources. Performing a reserve analysis will help you account for any buffer funds you may need. When performing a reserve analysis, you'll review all potential risks to your project and determine if you need to add buffer funds. These funds are necessary because new costs that you didn't originally foresee will arise. This is also known as contingency budget.

Contingency budget

Contingency budget is money that is included to cover potentially unforeseen events that aren't accounted for in a cost estimate. The purpose is to compensate for the uncertainty that occurs in cost and time estimates, as well as unpredictable risk exposure.

Cost of quality

The cost of quality refers to all of the costs that are incurred to prevent issues with products, processes, or tasks. The cost of quality includes prevention costs, appraisal costs, internal failure costs, and external failure costs.

Creating a project budget

When creating a budget, there are various resources and tactics that you can use to make sure you aren't overestimating or underestimating.

Researching historical data

For starters, you can always review past projects that are similar to yours to get an idea of what your project could entail.

Leveraging experts

Reaching out to colleagues who worked on a similar project in the past will be a great resource. You can also ask subject matter experts on certain costs.

The bottom-up approach

This means thinking about all the parts of a project from the beginning to the end, including making a list of every material, resource, contract worker, or anything that comes with an associated cost, and adding all of that together. You should also ask the vendors you are thinking of working with for quotes, so you can get a rough estimate of how much their work will cost.

Confirming accuracy

After you've created your budget with these resources, you'll want to double-check everything to confirm accuracy.

Setting the baseline

Your baseline is the dollar amount that you'll use to measure against, to find out if you're on track or not, and to measure the success of your project.

Adding buffers

It is standard to account for five percent of the overall project budget as the buffer, as unexpected costs may come up during the course of the development of the project.

Maintaining a project budget

Monitoring the budget is crucial, as you'll be able to tell if the plans you set into action are actually being implemented on both a financial and operational level. Milestones are a great opportunity to re-review the budget to identify if anything needs to be reset or revisited throughout the project.

As you monitor your budget, you'll want to be on top of cost control. Cost control is a practice where you identify factors that might impact their budget and then create effective actions to minimize variances. It's proactive budget management.

It is not a good idea for a project to go over the budget, as it may mean that the company will have less funds for other areas within the business. What about going under the budget?

Even though it seems like going under budget would be a project manager's dream, it actually isn't. Going under budget indicates that you may not have done a good job at initially estimating, that you could have spent more money on the project, meaning that you could have possibly had extra resources or better quality output, and it may mean that the budget for future projects will be slashed. The best option is to adequately account for, adapt, and manage your budget.