The project budget is the combined costs of all activities, tasks, and milestones that the project must achieve. In short: it is the total amount of money you will need to finish the project that must be agreed upon by all stakeholders involved.
You start creating the project budget during the inception phase of the project and continue to monitor it until the project reaches the finish line. A meticulously planned project budget is the holy grail of the new service economy where scaling smoothly and sustainably is critical to a company's survival.
Why is the project budget important?
Projects cannot be implemented without a detailed and well-defined project budget. Here are five reasons why you should formally budget a project.
A project budget is necessary to secure financing
- By looking at the budget numbers, stakeholders will get a sense of how much funding is needed and when the money is needed.
- A detailed project budget is essential to developing a good project plan, without which the project is likely to fail.
- Project management is defined as balancing project constraints. Cost is one of the three primary constraints on a project: scope, time, and cost. Creating a budget is essential to project management, as budget estimates address cost constraints.
- A well-planned budget is the basis for monitoring and controlling costs. Project managers can compare actual costs with the approved budget to determine if there is a discrepancy. It helps them check the progress of the project and whether they need to take corrective action.
- Establishing a formal budget helps companies remain financially viable. If budgeted properly, it will help improve project profitability and overall success.
How to create a basic project budget in six easy steps
These six steps can help you pull finances together and create a project budget summary:
1. Divide your project into tasks and milestones
Working with your to-do list will give you an understanding of what you'll need to accomplish and help you manage project cost. If you already have a to-do list, that's fine, and you can get started right away. But if you don't, go ahead and create a scope and write down everything your team needs to do.
2. Grade each item on the to-do list
Now is the time to give an optimistic appreciation for each item you have written down. At this point, identify all the resources and materials you will need to perform well and include them in your estimate when calculating the price.
3. Get your estimates together
This is probably one of the easiest parts of the project budget process, especially if you have a spreadsheet with two columns: tasks and costs. After that, you will be able to calculate the total speed.
4. Top-down estimation
This technique estimates the cost of the project as a whole. Then he breaks down the entire project into smaller components and allocates a portion of the total budget to these components. It is generally used when a fixed budget is allocated to a project.
Top-down estimation can be highly inaccurate as it is difficult to estimate the cost of the entire project without understanding its components.
5. Expert judgment
This method involves obtaining estimates from people who have specialized cost estimating knowledge, skills, or experience and an understanding of the scope of your project. You can hire a consultant if you do not have an in-house expert.
This technique relies on the experience and knowledge of the people providing the estimates. It requires a certain minimum understanding of the project's application area and environment. The accuracy of the estimates made using this technique depends entirely on the knowledge and experience of the experts involved,
Expert judgment is a basic technique used for all other estimation techniques.
6. Add contingencies and taxes
Better safe than sorry. Of course, you can't be 100% sure about the final estimate, as things change all the time. By adding contingency and taxes, you make sure that the project doesn't go over budget and that your estimated number is closer to the final costs you end up spending. If you don't know how much contingency to add, project management experts recommend taking 10% of the total.