Project Budgeting 101: Your Guide to Producing Your First Project Budget

Every project needs a budget. But you’re a Project Manager, not an accountant. So, most Project Managers find the thought of producing their first project budget daunting. Here, then, is my basic guide to Project Budgeting.

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Three Approaches to Project Budgeting

We will look at three approaches, starting with the way you would create an operational budget. That is, you start with a list of heads of expenditure or cost centers. This approach lends itself well to a template approach.

Activity, or Cost Center Project Budgeting

This is sometimes called Activity Budgeting. It is simple and 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 have 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

When to use Activity, or Cost Center, Project Budgeting

You don’t need to know all the products you’ll be creating, nor the tasks complete. You can estimate based on the sort of things you’ll need. So, this is not a rigorous approach to creating a project budget. 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

Work Breakdown Structure Approach to Project Budgeting

This is the most robust, rigorous, and reliable approach. And, it’s 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.

The Key Steps of Work Breakdown Structure Project Budgeting

The key steps are:

Scoping

Determine what your project will create, what it will not create (exclusions), and get this signed off.

Create your WBS

From your scope statements, develop a full work breakdown structure. I’ll put a link to our video that shows you how, into the description: https://youtu.be/PyR2VLP3xnA
https://onlinepmcourses.com/how-to-create-a-work-breakdown-structure-a-wbs-masterclass-video/

Estimate costs to create a CBS

For each element of the bottom tier of your WBS, develop a cost estimate that takes full account of:

• The time and time cost of the work
• The materials and consumables used
• The cost of equipment or other assets

In doing this, you may need to work by combining unit costs for each type of resource, and estimates of the amounts you’ll need. We also have a video about estimating project costs.

Aggregate your costs into your project budget

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

• 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.
• If you are relying on simpler tools…
  Then a spreadsheet is your best friend here. Build a spreadsheet or use the one that already holds your WBS Dictionary.

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:

RACI Chart Approach – aka Linear Responsibility Chart – to Project Budgeting

The terms RACI Chart and Linear Responsibility Chart have converged, and here is not the place to go into the history. What I am referring to is a table of Resources against activities or workstreams. Again, we have a video about how to create a RACI Chart.

Use a RACI Chart 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.

You can make your budget estimates at any level of precision, from the workstream level down to the task level.

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

Step 1: Build Your LRC Framework

Draw a grid – ideally 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.

Additional Things to Think about in Project Budgeting

Whichever process you use, there are two additional things to always include:

1. Whole Project Costs
2. Contingency

Whole-Project Costs

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

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

Another overhead of managing the project! However, my strong preference is to include Project Management as a work stream in your WBS, Cost Center Analysis, or RACI Chart. That way, you can do a bottom-up estimate of the individual costs.

Contingency

Of course, you will always need to add a contingency to your project budget.

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 a 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 will 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.

Recommended Videos to Help with Project Budgeting

Carefully curated video recommendations for you:

• How to Estimate Project Costs | Video
• How to Anticipate Future Budget Challenges to Your Project | Video
• Pressure to Reduce Your Project Budget | Video
• How to Deliver Effective Project Cost Management | Video
• Project Financial Management – 5 Tips for Good Cost Control | Video
• Don’t Let Your Project Get Caught in the Cost Trap | Video
• Project Cost Management and Self Preservation | Video

Recommended Articles to Help with Project Budgeting

• 3 Ways to Produce Your Next Project Budget
• Project Cost Management: What You Need to Know and Do

What Kit does a Project Manager Need?

I asked Project Managers in a couple of forums what material things you need to have, to do your job as a Project Manager. They responded magnificently. I compiled their answers into a Kit list. I added my own. 

Check out the Kit a Project Manager needs

Note that the links are affiliated.

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