Budgeting is one of the most critical tasks during the initial stages of project management. All projects involve cost, which depends on the scope and magnitude of the project. Also, one should factor in the length of completion of the project and the available resources.
What then is a project budget? A project budget is the total estimate of costs or expenses required for the completion of a project. It takes into account the major and the miscellaneous costs that the project needs.
These estimates are mostly made based on the availability of funds, even though they may correspond with the actual value required to complete the project. To help you develop the best comprehensive budget for your project, we look at some of the necessary steps you should not miss.
1. Use Historical Data
You have to understand that your project is likely not the first to attempt to achieve a given goal or objective in the organization. You will uncover similar projects when you probe harder. Therefore, take your time and look for similar projects and their budgets to help you develop the proper estimate.
Remember, drafting a project budget is all about estimating the expenses likely to be incurred until completing the project. Looking back at similar ones that have been conducted over time will give you a defined starting point.
However, note that the scope and length of projects differ, and therefore, do not greatly rely on the budgetary information of the previous projects unless you are sure that both are similar. Also, you should take factors such as inflation into account.
2. Take Note of the Lessons Learned
This is tied to the first point. It would help if you learned from the successes and the mistakes of the previous projects. Where did they go wrong in their budget? Why did they exceed the estimates by such a significant margin? What should they have done better?
When you note the budgetary shortcomings and strengths of former projects, you get a clear path to come up with more accurate estimates. The lessons learned will also help you know how to respond to changes and keep your budget under control.
Come up with a means of tracking such findings in your organization.
3. Identify the Project Scope
The project scope should guide you on making the right or more accurate estimates. Before you can establish any costs that will go into your project, you need to define and master the project scope, timelines, and deliverables.
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More extensive projects have a comprehensive project scope and may need more staffing. Also, if a big project has a shorter timeframe, you will always need more resources. Therefore, ensure that you have a well-defined project plan for better project planning.
The easiest way to go around this is to come up with a WBS structure for the project. This is the Work Breakdown Structure, which allows you to picture all the work involved in the project in detail.
Once you have the WBS in place, you will have an easier time coming up with the resource requirement geared towards completing the project.
4. Define Resources
Once you have come up with the WBS and understand what the project is all about, it is time to gather the different budget pieces. The fourth step, therefore, is to determine the resources required for the completion of the project.
While defining resources, most project budgets consider five essential items, which we will explain shortly. However, even these depend on the nature of the project. Here are the four things that you should not miss while defining your organizations or project’s resources:
You need different pieces of equipment to achieve whatever you have set out in your project. These differ from project to project. In a construction project, equipment means machinery such as a tractor or bulldozer, whereas, for a software development project, it may mean tools such as software.
Therefore, first, understand the nature of the project you are working on before coming up with a list of equipment you will need. Ensure that you note down all the necessary equipment to avoid under-estimation.
This should be the first item to consider while defining your resources. Even with all the equipment in place, you still need the right staff for a successful project. Staffing is usually the most expensive cost since it entails everyone who will be required for project success.
Therefore, ask yourself whether your project needs additional team members or not and whether you may have to make more additions as it progresses. Also, you must think of the payment terms of the staff. Will they be paid on an hourly basis? If yes, the project length should be in hours.
If they are paid every month, the project length should be in months and so on. All in all, you have to think of everyone whose efforts will be required for the successful delivery of the project.
Sales and Marketing
Whereas this is not applicable for all types of projects, yours may require sales and marketing. Therefore, you have to factor in such costs when coming up with the project budget. A good example is doing a product launch.
However, this is not strict for all types of projects, like we mentioned. Do not fix an unnecessary budgetary cost if your project does not need it.
You have to factor in the training costs once you introduce a project. This is important since a new project involves probable change management in the organization, and there is no better way of handling changes than training your staff.
Also, note that you will have to invest more in training if it is more extensive. Therefore, make such allocations for training your staff in your budget.
This is usually the last item to consider when defining your resources. The miscellaneous costs are dependent on your project. Therefore, when referring to previous projects, do not significantly rely on their miscellaneous expenses, or you may end up including unnecessary costs on your budget estimate.
Miscellaneous costs usually include any other thing not covered in the first four items. If you have to travel or engage outside companies for the project, be sure to include all these costs in the miscellaneous items. Also, be sure to include other costs such as insurance or consultations, if needed.
An important hack when defining the resources needed for the project is to list all the people and items required to complete the project successfully. Also, do not fail to align these resources with the currently available resources.
5. Evaluate The Cost of Resources And Assign Amounts
By now, you definitely know the resources required for your project. Therefore, it is only fitting that you evaluate the costs of the resources and assign amounts. Therefore, look at the list of resources you have drafted and assess the costs.
However, this may turn out to be more expensive than you think. Therefore, ensure that you research far and wide and accurately determine dollar amounts. Also, the first step will come into play at this juncture.
Look at budgets of previous but similar past projects. Also, use the web and look up online resources while engaging other team members who may experience different items and related costs. Remember, you may have to involve as many people as possible for accurate estimation.
You may also have to model out costs for some resources such as staffing, given that employee salaries differ from person to person. Therefore, build a model in project management software to estimate the overall cost of staffing during the project’s progression.
6. Build You Budget
The fourth and fifth steps should give you your estimates. Therefore, once you have gone through your list of resources and assigned amounts, it is time to build your budget. However, you should remember to include a few items in your budget.
First, include a contingency fund in your budget. However, it would help if you did this based on one of the project’s profile risks. Keep in mind that riskier projects will require more contingency. Therefore, include a contingency fund and sum it all up.
The next step is to compile the different estimates established in the fourth and fifth steps in your project management software or the specific tool you choose. You can also group related items together when using s spreadsheet or a free-form tool.
Also, have in mind any assumptions that went into the figures when building your budget. This should help you as the project progresses since some assumptions may be accurate and others false. Considering the assumptions will help you deal with budget diversions and understand why not all the estimates came true in the budget.
If your budget will extend for a longer duration, say more than a month, be sure to include a timeline. This will allow you to note any recurrent costs in the budget and identify when such expenses are likely to come up again.
Also, add taxes while building with your budget. Remember, you are coming up with a comprehensive budget and not a face value estimate. You need to pay tax, and whether you delay it or not, it is bound to happen. Once you have included the contingency fund and tax, sum it all up since this is the value you will present to the sponsors.
Once you have come up with the final budget, review it with your teammates and collect their feedback. Remember, one of the critical practices in project management is to get everyone involved in the project, which can be best achieved by collecting feedback.
Also, your teammates can help you identify some of the items that you missed and whether the amounts are accurate. You do not want to make budget mistakes early, and either cost the organization or get your budget rejected.
7. Obtain Approvals
Once you have drafted the overall budget, it is time to obtain approval from the stakeholders and the business leaders. Remember, coming up with an account is one thing and getting it approved is another. Therefore, you need to be prepared to justify the items and amounts.
A critical hack is to highlight the key assumptions and rationales that you may have used to come up with the budget. Remember, you should make your presentation as convincing as possible to lead the stakeholders and business leaders into acceptance.
Also, keep in mind that the project budget may be higher than what the stakeholders and leaders expected or within their intended range. Therefore, responses may differ. You may be asked to cut down some costs or increase funding based on what they anticipated.
Feel free to contribute and offer your opinions on some of the recommendations put forward by the stakeholders and the business leaders. If they ask you to overstretch the budget, you can convince them how bad an idea it will be. However, do not try to force them into accepting your recommendations.
8. Implement and Track Spending
Once your budget has been approved, it is your responsibility as the project manager to oversee it, which means you ought to start spending. A good move would be using project management software to track costs. Remember, the cost will be affected if the teammates begin falling behind on deliverables or you start experiencing unexpected delays.
Also, remember to maintain a report of everything you buy and track the progress against your budget. Identifying everything beforehand should help you achieve smooth sailing. Look at your current costs to help you compensate the budget or request an increase with a valid reason and game plan.
Coming up with a comprehensive budget before the commencement of your project allows you to have an easier time in project execution and meet the objectives. Therefore, make sure that you give your budget preparation the attention it deserves.