How to create a project budget? | #42 Getting started with project management

According to a report by the Project Management Institute, in 2021 62% of projects were completed within the original budget. The best performer in this ranking was China with 66%, while came Europe last with 57%. Poorly created project budgets are responsible for a fair share of failures in this regard. So how do you estimate costs in a project to increase the likelihood of its success?

Project budget – table of contents:

1. Introduction
2. What is and what makes up the project budget?
3. How to estimate the cost of the project?
4. Project budget estimation tools and methods
5. Summary

Introduction

Improper project execution results in a loss of $19 million for every billion of investment (PMI 2019), and only 34% of organizations usually or always finish projects within budget (Wellington 2021). To find out how to among this group, let’s take a closer look at what a project budget is and the ways and tools to prepare one.

What is and what makes up a project budget?

The project budget is the rough approved amount that the organization intends to spend on the project. It’s founded on estimated project expenses and it features in the budget of the entire organization.

The Project Manager should include in the project budget all costs related to the project, such as:

• Direct costs – expenses needed to perform tasks directly leading to the realization of the project objective, i.e. materials, labor and tool costs, equipment and supplies,
• Indirect costs – costs that cannot be directly attributed to the project, but which are incurred in connection with its implementation, such as administrative costs or, for example, project management costs.
• Capital expenditures – costs associated with the acquisition of so-called long-term assets, such as buildings, equipment or machinery.
• Operating costs – recurring costs associated with operating and maintaining the project, such as utilities, insurance together with maintenance,
• Contingency reserves – funds set aside to cover unforeseen events or changes in the scope of the project.

How to estimate the project budget?

The projected cost of scheduled work is referred to as the Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV). Both indicators denote the sum of funds needed to complete the work scheduled within a given period.

To estimate the project budget, the Project Manager should carry out several activities to get the most precise quotes. Firstly, the Project Manager should know all the requirements of the project, such as the scope of work, deadlines and resources that will be needed to complete the project.

The next step concerns investigating market prices for the resources and services to incorporate in the project, i.e. the price of materials, supplier services together with salaries for the project team.

After obtaining requirements and pricing data, the Project Manager can begin the process of first detailed budget estimation. Once it is completed, however, he should immediately review the budget with the project team. This will ensure that all costs have been included and that the budget is as realistic as possible.

What’s more, the project budget needs regular reviewing and updating to keep it on track and within budget.

Tools and methods for estimating the project budget

When estimating a project budget, an indispensable tool is the well-known and popular Microsoft Excel. Its main advantage is its accessibility and ease of use, as well as the ability to perform many calculations and analyses. The disadvantage, however, is that Excel does not have a function to automatically update the budget in real time.

However, it will work well for estimating the budget before implementation. For an ongoing review of expenses, we recommend project support tools such as Firmbee. The system allows team members to monitor in real-time the receipts and expenditures associated with a given project.

To create an accurate budget, you can use the following methods:

1. Bottom-up estimation. This method involves estimating the cost of each project activity and adding up their costs to determine the total cost of the project. It is time-consuming and requires detailed knowledge of project activities. However, it provides a high level of accuracy and helps identify all necessary costs
2. Parametric estimation. This method involves using statistical data to estimate the cost of project activities. It is much faster than bottom-up estimation, so it can be useful for estimating the budget of large projects, as long as the organization has a source of reliable data. Despite this, it may not provide a sufficient level of accuracy.
3. Expert evaluation. The third method involves harnessing the knowledge and experience of project stakeholders, including the Project Manager and team members, to estimate the cost of project activities. It can provide a high level of accuracy, practical for complex projects. However, it relies on the expertise of individual stakeholders, so it may be biased and generate conflicts. In addition, it is difficult to account for changing business conditions, such as inflation or changes in the law.

Summary

Creating an accurate project budget is time-consuming and requires experience. That’s why it’s a good idea to try different tools and take advantage of available budget preparation methods, such as bottom-up estimation, parametric estimation or expert evaluation.

If you like our content, join our busy bees community on Facebook, Twitter, LinkedIn, Instagram, YouTube, Pinterest, TikTok.