How to Create & Manage a Project Budget

Your Guide to Project Budget Management

 

Even if finances aren’t your favourite pastime, you can’t avoid project costing and budgeting. You’ll have to face the numbers eventually - otherwise, your next project will be chaotic.

Simply put, a project budget estimates the costs to complete a project.

But - it's not just about coming up with a single overall amount. Instead, you’ve got to understand the numerous little costs and the best way to track a budget throughout the project. You’ve got to consider:

  • How to calculate the total. (Did you know that 24% of professionals think unrealistic budgets have harmed the projects they’ve worked on?) 

  • How to allocate costs to project milestones

  • How to track costs

  • How to handle projects that go over or under budget

Below we’ve covered the best way to estimate a budget, manage costs, and how to handle things if you go over budget. 

Let's get budgeting.

How to Estimate Budget for a Project

No matter the project, businesses have to make sure it’s cost-effective. That’s where learning the best way to estimate a budget comes in.

Don’t shoot the messenger, but every business handles its projects in a unique way, which makes it impossible to create a universal project budget management template.

However, there are three strategies we recommend using if you want to increase your project estimation accuracy.

1. Bottom-up estimation

Digest each project plan task and add up the costs.

Bottom-up estimating is a tried and tested method you can always rely on. Plus, it’s the way to go if you know the project inside and out.

Some Cons are:

  • It takes a lot of time to work out a detailed plan. 

  • Plus, it’s hard to estimate everything entirely at the start. That’s why most budgets are fully developed after the project has begun.

Some Pros are:

  • It’s incredibly accurate.

  • It lets you track a project’s progress in lots of detail. If tasks take longer than expected, you know immediately that a project is running over budget.

2. Top-down estimation

The total is calculated first then divided into tasks or milestones.

Top-down estimation is the polar opposite of the bottom-up strategy. It’s often used for fixed-price projects with a specified budget as it assumes the budget is set before the project begins and won't change.

The Cons are:

  • Estimations can be wildly inaccurate at the start as a clear scope of work and strategy haven’t been developed.

  • It can cause sales and project teams to be out of sync when estimates are changed later on.

The most significant Pro is it’s rapid. Quick estimations can increase sales as they assist customers in determining if their budget will work.

3. Analogous estimation

Analyse data from similar projects to estimate costs.

You've undoubtedly managed a few projects before and know what works and doesn't. Using similar estimates, you can base your estimate on previous projects' budgets and best practices. (If this is your first project, a fast Google search typically yields useful examples.)

The Cons are:

  • It’s imprecise as every project is one of a kind.

  • It requires accurate historical data to be feasible and useful.

The leading Pro is that this strategy is beneficial when you need a ballpark estimate.

Components of a Project Budget

To satisfy all of your project's financial needs, a detailed budget must be developed. But your budget shouldn’t be static. Circumstances change. Disasters happen. Life gets in the way. Be prepared to adapt the components of a project budget at any moment.

Your budget must include direct and indirect expenditures, constant and variable costs, labour and materials, travel, equipment and space, licensing, and anything else that may affect project costs.

We’ve prepared a list with the standard project expense categories:

  • Human resources - this includes full-time and part-time staff, contractors and any other contributors.

  • Travel expenses - for anyone who moves around to work on projects. Remember to have a budget for meals and hotels.

  • Training fees - those on the team may need extra training, workshops, or to attend conferences.

  • Material resources - including software, equipment, and other things your team may need to complete their work.

  • Research expenses - for commissioning any studies or data to help your project succeed.

  • Professional Expertise - especially legal professionals, to ensure everything is covered.

  • Contingency funds - having a safety net is essential. Always keep 5-10% of the budget for contingency funds to allow flexibility and avoid budget overruns.

How to Manage a Budget

Managing a budget is easier on paper than in reality. A worldwide pandemic and re-aligning goals to remote working has made things even more difficult.

We’ve gathered our best advice below:

Recognise stakeholder needs 
Identifying, documenting, and confirming project requirements with all stakeholders is the first step to efficiently managing project budgets.

Recognise changes
Always be realistic and allow for unforeseen adjustments. If circumstances change, consult all relevant stakeholders.

Control change with precision
A seemingly minor adjustment in a process can drastically increase costs and throw budgets off. Interact with project teams regularly to communicate specific solutions.

Create useful Key Performance Indicators (KPIs)
KPIs let you track project costs, how much the real budget differs from the intended budget, and so on. Set these early on to stay on top of things.

Review and update in real-time 
Each week, you should assess your project’s current and projected expenditure. Then you can focus on the rest of the project, knowing you have the necessary resources ready.

Finding the project management tool that works best for you is vital. Luckily, this is a topic we’ve covered before. 

Why do Projects Go Over Budget?

It’s a fact that errors and delays cost money. More money may push you over your budget, especially if you’ve already used your contingency.

There are a variety of reasons why projects go over budget. Unforeseen events may increase expenses, while human error can cause expenses to rack up:

Project Manager Errors: 

  • Inexperience leads to a lack of foresight and poor planning. This can cause funds to be poorly allocated to non-vital tasks.

  • Managers may not have the best communication processes in place. Being able to talk quickly and effectively can save time, money, and stress.

  • Everything from misplacing a decimal point to ordering the wrong equipment can cause budgets to balloon.

  • Leaving scope creep left unmanaged, which is when new items, features, and deliverables are continuously added.

Team Member Delays: 

  • Being ill or having an emergency crop up is acceptable, but excessively absent individuals will impair a project's progress. 

  • Management must carefully select the people who will lead a project to completion.

  • Unreliable team members, contractors, vendors, or suppliers may cause issues.

Environmental Factors: 

  • Weather and natural disasters are unavoidable. Conditions that prevent team members from getting on-site or delay supply deliveries might permanently put a project on hold. 

  • The project may even have to restart if critical equipment fails.

What to Do When a Project is Over Budget

Despite over a quarter of all projects going over budget, project managers still dread budget overruns. 

Below we’ve gathered some budget management techniques to help keep your project on track, your stakeholders happy, and you stress-free.

First and foremost: always be truthful. It's easier to build trust with stakeholders if you're honest and realistic.

Project managers need to quickly take action to address the budget overrun. 

Step One: Assess the situation and determine what caused the budget to overrun and what impact it had.

Step Two: Evaluate your options and make recommendations. We can’t give you an exact guide, but often managers adjust project priorities, negotiate for more financing, find volunteers for unpaid overtime, and reduce non-labour related costs. If drastic measures are needed, managers use their budget buffer to hire lower-cost or more productive workers.

Step Three: Inform the key stakeholders of your plan immediately to prevent the project from stalling. 

But - going over budget isn’t always solved simply by asking for more money. Those extra funds impact other projects and the business as a whole.

Project Budget Example

At ADAMAPP, we’ve developed many apps since we started. From Tesco to Metlife, we’ve had to create our fair share of project budgets to get the ball rolling. 

Using our extensive experience, we want to help you see how to manage a budget for a simple app. First up is labour costs. You'll need everything from project and project managers, and quality assurance managers to developers, designers, and content creators.

Next up is determining every task that each team member needs to do. Everything from creating wireframes to having weekly status update meetings needs to be accounted for.

After determining the project's tasks and crew, you'll need to choose the materials required. Will they need new hardware? Software? 

Don’t forget about travel costs and office or accommodation expenses. These can creep out quickly if not budgeted for. 

You’ll also need a column for miscellaneous costs that don't fit anywhere else in the budget. These can be subdivided further if required but usually include admin, accounting, insurance and legal fees.

A planned versus actual column is useful. Making an app is likely to require many revisions and pivoting, which impacts the budget. These sections help you keep track of your spending and stay within budget.

You may submit this estimate to a client and ask for a lump sum to start the app-making project. This estimate should include the project name, manager, and date. Additionally, the estimate will outline who will do what and how much work will be put into each project phase. Then you'd create a statement of work and gain approval using a purchase order.

Importantly, this estimate should include 3rd party costs and a budget summary that a client may use. Because it's a project budget example, we haven’t even touched on other expenses, such as training fees, research fees, and a contingency.

As you can see, things get complicated quickly. Learning how to manage a budget for an app isn’t a walk in the park.

App development project budgets

You can save yourself the stress of learning these techniques if you decide to build a digital product with us. At ADAMAPP, we have handled project budgets throughout the production of apps and websites for organisations in various industries. Contact us to discuss your project.

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