3 Ways to Produce Your Next Project Budget

Every project has a project budget. But it sometimes feels like something of a dark art to produce it. After all, you’re a Project Manager, not an accountant.

And yes, I know that some people are both – I’ve known Project Managers who have gained accounting qualifications and accountants who have moved into Project Management.

But most Project Managers find the thought of producing their first project budget daunting. And it hardly gets better throughout your career.

So, in this article, I want to show you three ways to produce a reliable project budget.

Summary of the 3 Ways to Produce a Project Budget

The three ways we will look at are:

1. Work Breakdown Structure Approach
   This will never be the wrong way to produce your project budget. It is robust, reliable, and the nearest thing there is to a ‘standard’ method. From a Work Breakdown Structure (WBS), you add costs to create a Cost Breakdown Structure (CBS). This forms the basis of your budget. Other approaches simplify the process in specific circumstances.
2. Linear Responsibility Chart Approach
   Use a Linear Responsibility Chart (LRC) as the basis for your project budget for simpler projects, where the bulk of the cost lies in people’s time. This can be staff time, contractors, or consultants. It’s ideal for costing out professional services projects, like consultancy and advisory services.
3. Cost Center Budgeting
   This is the nearest to an accounting approach. Calculate budget by activity type or cost center. This is sometimes called Activity Budgeting. It is the simplest approach and the least rigorous for the project environment. So, works well in three circumstances:
   1. Monthly budgets for a long-running project
      A quasi operational situation
   2. The basic budget for a simple project
      Where detail and rigor has less priority
   3. Outline or indicative budget for a larger project
      For when you need a first pass budget and will go on to create a more rigorous final budget

We will look at each of these project budget approaches and the links in the list above will take you quickly to the one you need.

Work Breakdown Structure (WBS) Approach to Your Project Budget

Before we start, let’s remind ourselves what a WBS is…

We have a wealth of learning about the WBS in our online courses – especially our Project Manager’s Immersion Program. might also be interested you see how the WBS fits into the wider project planning process in this video: Project Planning Process – How to Build Effective Project Plans | Video

A Simple 4-Step process

We’ll break down the WBS approach to creating a project budget into a simple four-step process:

1. Scoping
2. Create your WBS
3. Estimate costs to create a CBS
4. Aggregate your costs into your project budget

1: Scoping

Again, let’s start with a chance to remind ourselves what project scope is…

The first step is about understanding the breadth and the depth of the work you will need to do. This means negotiating with each of your stakeholders to understand the needs, wants, and preferences.

Scoping is hard. You need to accommodate competing priorities within what will almost certainly be a constrained budget and schedule.

The end product of the scoping process is a formal statement of scope, which will document:

• What will be in scope
  The work the project will do or the deliverables it will produce. A scope statement can be framed in terms of either work or products, but I do recommend you stick to one or the other to prevent overlaps and confusion. In the US, product-based scope statements are more common. In the UK, we prefer a work-based approach.
• What will be out of scope (Exclusions)
  This will list potential scope items (work or deliverables) that you have determined are not needed or are of too low priority to accommodate.
• The sign-off process
  You need to have formal authorization of your statement of scope before you proceed.

2: Create Your WBS

Once you know what your scope is, you need to build a detailed Work Breakdown Structure.

You can build it top-down or bottom-up.

Top-Down

Start by splitting your project into logical chunks. Five to nine chunks will work well. And then break each of those down successively. By the time you get to the bottom-tier of tasks (or products), you will have a full and detailed scope list. This is the ‘usual’ way to create a WBS.

Bottom-Up

The alternative is to detail every item of your scope and then cluster them into logical groupings. Then cluster the groups until you reach the ‘whole project’. This is a less rigorous way to create a WBS, but it works well as a team exercise.

Top-Down and Bottom-Up

Whichever approach you take, repeating the exercise a ew days later, using the alternate approach will either:

• Give you comfort that you did not miss anything of substance, or
• Expose important things you missed, before committing to a budget and schedule

3: Estimate Costs to Create a Cost Breakdown Structure (CBS)

This is the hard part of creating your project budget. From your WBS, you need to create a series of cost estimates. This will allocate a cost to every WBS element at the bottom level. You then aggregate a level at a time to create a Cost Breakdown Structure (CBS).

Cost Estimating Process

There are four steps to estimating the cost of each WBS element:

1. Determine what resources you need to carry it out:
   1. Numbers, skills, and experience level of people
   2. Assets, tools, equipment, etc
   3. Components, materials, consumables, etc
   4. Any other resources, like licenses that are specific to the WBS item
2. Set a unit cost against each resource
3. The amount of each resource you need:
   1. Durations for people
   2. Number of each asset, etc
   3. Amounts of consumables
4. Multiply out the unit costs and amounts for each resource, and then add the totals

Better still, allocate Work Stream leaders and ask them to make the cost estimates for their work streams. That way, you role is as an objective reviewer.

Learn More about Estimating

By the way… Do also take a look at our article on estimation: Project Estimation: Master the Art and Craft.

4: Aggregate Your Costs into a Project Budget

Now you have a full Cost Breakdown Structure, how do you aggregate this into a project budget? There are two common approaches, depending upon what resources you have available:

1. If you have some form of integrated Project Management software, or Project Management Information System (PMIS)…
   You’ll probably have built you CBS in this. It will do the aggregation for you. Otherwise, just enter your data and let it do the work. Note that some Enterprise Resource Programs like Oracle and SAP have project modules. So, these allow you to enter project budgets from your CBS.
2. If you are relying on simpler tools…
   Then a spreadsheet is your best friend here. Build a spreadsheet, but note that getting WBS numbering into it is not as easy as you’d think it would be!

Your outcome will be a table, with WBS items on one axis and resource types on the other. Costs will sit at the intersections. Here is an example:

Whole-Project Costs

These are costs that cross the whole project and you may not have included in you CBS. Examples include:

• Insurances
• Licenses
• Finance costs (such as loan interest, bank charges, foreign exchange, etc)

You’ll need to add these onto your budget now.

On of these is is the overhead of managing the project! Although, my strong preference is to include Project management as a work stream in your WBS. That way, you can do a bottom-up estimate of the individual costs.

Contingency

Of course, you know that you will always need to add a contingency to your project budget. But, using the WBS method for creating your budget means you can make an explicit choice about how to both:

• Add the contingency
• Allocate elements of it to individuals across your team

Creating a Contingency

There are four approaches to creating a contingency:

1. At one extreme, you can add a big chunk to your project.
Usually as a percentage of the total budget figure. It’s simple, it’s crude, and it only really makes sense for simple projects.

2. Next in line is also the simplest approach that commonly makes sense.
Add contingency to each workstream. And base the amounts on the level of confidence or uncertainty you have in the estimates for that workstream. Some activities are inherently more risky:

• More things can go wrong
• You are less certain about base costs
• There is more novelty in what you will need to do

So, while one workstream may have a 15 percent contingency, another may have 40 percent.

3. At the opposite extreme…
You could instead add contingency to each individual WBS element and aggregate the contingencies up, as you do with the costs. My fear hear (aside from the amount of work) is that you will fall into the precision trap. That is, you wil believe that your highly precise contingency estimate is therefore equally accurate.

4. A common sense balance…
is to add contingency at an intermediate level – that of individual work packages. For complex projects, this is likely what I would consider, if I thought the second option too blunt to get a robust assessment of the contingency I’d need.

Allocating responsibility for the Contingency

Here, you have three simple approaches available to you. You can give responsibility:

1. at the same level as you allocate budget responsibility.
2. to the person at one level above or at a higher level – maybe even to workstream leads.
3. to no-one. Keep that responsibility for yourself.

Linear Responsibility Chart Approach to Your Project Budget

Let’s get started by reminding ourselves what a Linear Responsibility Chart (LRC) is…

LRC or RACI Chart?

Many people will call an LRC a RACI chart. While they do the same thing, strictly, they are different. Do I care about the naming? No. ‘A rose by any other name smells just as sweet.’

But, if you want to know the answer to What is a RACI Chart? we have a companion video:

Here’s the thing… When it comes to creating a project budget, it’s the LRC format that we can readily use. It’s probably possible to use the RACI layout. But I wouldn’t try. I’m thinking you’ll get yourself into an unnecessary pickle!

How to Use a Linear Responsibility Chart to Create your Project Budget

The first thing to say is that you can make your budget estimates at any level of precision, from workstream level down to task level.

The other thing to note is that, whilst you can add any form of resource to an LRC, it is best used for people. So, this approach to project budgeting is best for human resource intensive projects, like professional services or software development.

Step 1: Build Your LRC Framework

Draw a grid. The best place to do so is on a spreadsheet.

Down the left-hand side, list all of the activities (from your WBS if you have one). As I indicated above, this can be at whatever level of detail or consolidation you prefer.

Step 2: Populate it with Resources

Across the top, list all your resources. Start with your people. And then, to the right-hand end, add other resources you need to include in your budget.

…and add in the ‘rate’ for each resource

In the cell below each resource, put the rate for that resource, in the units you will be using. For people, this may be, for example:

• an hourly rate
• a daily rate
• a day-rate equivalent, calculated from either their actual salary or a notional or proxy salary figure based on their status.

Step 3: Make Estimates of Resource Utilization

In the cells, make estimates of the resource requirement for each resource and each activity.

Now your spreadsheet can easily calculate the total commitment of each resource. And, from that and the rate figure, you have the cost of each resource.

If you want to present the cost for each activity, it is a simple modification of your spreadsheet:

Step 4: Add on Costs that the LRC Cannot Host

As with our WBS-based Project Budget, you may need to add on extra budget items separately.

Cost Center Budgeting

The last approach to creating a project budget is rather the same way as you would create an operational budget.

You start with a list of heads of expenditure or cost centers. This approach lends itself well to a template approach.

The benefit of this approach is its simplicity. You do not need to know what all of the products or tasks are. You can estimate based on the sort of things you’ll need. As a consequence, this is a far less reliable approach to creating a project budget. So, I would only recommend it for:

• Simple projects
• A first pass estimate, or
• A phase or period in a long project, where the cost base is well-understood

What is Your Experience of Producing a Project Budget?

I would love to read your experiences, opinions, and questions in the comments below. I will, as always, respond to every comment.

Two Short Videos You will Like:

1. How to Anticipate Future Budget Challenges to Your Project | Video
2. Pressure to Reduce Your Project Budget | Video