This might sound like a no-brainer, but accurate budgeting for projects and successful project management go hand in hand. Yet, you would be surprised by how many companies struggle to create a budget and just go with a hunch, coming up with budgets that “feel” good.
If you’re working with clients, for example, you need to give clients an estimate of the cost before starting work on the project, and you need to make sure that your company is left with a decent profit margin too.
For these reasons, creating an accurate project budget is essential to project management. But how do you create an effective budget, what should it include? Moreover, how can you track all your project expenses to make sure you actually stay within budget?
We will go over the steps you need to take in order to create your project budgets in this article, along with practical tips for project budget tracking to help you maximize your profits.
In this article we will discuss:
- What does an effective project budget include?
- How to track your project budget: a step by step approach
- Step 1: Determine the project tasks and all related budget items
- Step 2: Calculate the project budget
- Step 3: Get the project budget approved
- Step 4: Establish a system to track your project expenses
- Step 5: Create project milestones
- Step 6: Monitor your project budget
- Step 7: Establish a system for budget adjustments
- Track your project budget with Rodeo
The definition of a project budget is the total cost of all the activities (labor) and supplies needed to complete a project.
Here is a breakdown of all the things that can be included in a project budget:
Each hour worked on the project has a cost, as employees carrying out tasks and activities during the project are paid a salary. Whether you are dealing with freelancers charging an hourly rate or have in-house employees who dedicate a number of their contract hours to a project, this is something that needs to be calculated into the budget.
All the costs of materials, products, equipment, and software needed to complete the project fall under this category.
This includes all the travel expenses and other logistical costs incurred while completing the project.
Any type of training required in order to gain the skills/knowledge needed to complete the project, including courses, conferences, consultations, or facilitators.
The scope of each project is different of course, meaning that different things will be included in each project budget. In any case, all related costs should be calculated into the budget to ensure a healthy profit margin.
Especially when you are planning to work on a complex, or long-term project, creating the budget for it is definitely not a walk in the park.
In the steps below, we will explain how to create an effective budget, and which steps you should follow to track all related expenses while the project is moving forward.
The first question to ask before you start a new project is: What is the goal? Once you know what you want to accomplish, you can break the project down into different phases.
Each phase includes all the tasks and activities that need to be carried out, in chronological order. Planning this all out per phase will remind you which resources you will need to carry on to the next phase.
This actually means you are already drafting the first version of your project plan at the same time as your project budget, and you might have to keep switching between the two to make sure your budget is as accurate as possible.
However, you are not estimating any final costs at this point. The goal right here is to create an overview of everything that you will have to determine the cost for.
Now that you have listed all the items that will cause expenses, the next step is to estimate the cost of each item, and eventually, the estimation of the total project cost.
There are two strategies you can use to estimate the project budget, depending on the type of deal you have on the table.
Top-down budgeting: This is when you already know what the maximum budget is for a project. For example, when a client wants a certain product or service and gives you a maximum amount they are able to pay for it. In this case, you already have a total sum for the project and you break it down into tasks and activities that can be completed at that cost.
Bottom-up budgeting: With this strategy, you do the complete opposite. You break the project into tasks and activities first, then estimate how much they will cost. Once this is clear, you add all the costs up to arrive at the total project budget.
In contrast to top-down budgeting, your total project budget could potentially land anywhere with bottom-up budgeting.
It all depends on what the actual cost is for your team to complete a certain task, which you know if they have carried out a similar task before.
Here are a few budget estimating techniques to consider:
Analogous estimating: If you routinely do a lot of projects that are super similar, you can take the past project budget and simply adjust the variables. This only works if all the supplies, tasks, and activities are almost the same though.
Parametric estimating: This technique also uses data from past projects, but it bases its calculations solely on algorithms and statistical information to create a data-driven estimate.
3-point estimating: Looking at past data, this bottom-up estimating technique looks at previous calculations for each task, taking a weighted average of your best, worst, and most probable budgets for each task.
Having historical data is key! So it’s quintessential to have some sort of system in place that records all your project data.
If you are starting a marketing campaign project for which your freelancer must produce some vector images, you can take a look at past similar projects. If you know how many hours it took him/her to create one of these images, you can calculate the total by multiplying your freelancer’s hourly rate according to the number of images they need to produce.
Also read: The fundamentals of estimating
Once you have finalized your project budget, you need approval before moving forward.
This means that you need official approval from upper management and other stakeholders, and you also need to confirm with your client what the expected cost for the project will be.
For this reason, it’s important to create a concise document showing an overview of the complete budget breakdown. This way, your client and all stakeholders will see exactly how you arrived at the grand total, with each item accounted for.
After your budget is approved, you can start work on the project. But before you do, make sure there is a system in place that helps you track all expenses to the budget while the project is moving along.
You can do this by creating a spreadsheet with all budget information, and updating it whenever an expense is made. But this method is very outdated, and not very efficient as it involves constant manual updating.
Ideally, you would use a project management tool for this. Some of the most intuitive tools, such as Rodeo, make it super easy to create your project plan and connect it to your budget. Time tracking and all other expenses are also processed in Rodeo, getting automatically deducted from your budget.
The importance of tracking time spent on projects is often overlooked, and most employees hate having to do it. Especially creatives!
But, every worked hour spent by employees on a project costs money, and thus affects how profitable your project is in the end. Moreover, efficiently tracking worked hours provides you with valuable information to base future projects on.
If time tracking is made as easy as possible, your employees are more likely to do it. Rodeo has a very simple built-in timer, which tracks time to the relevant budget. However, hours can also be entered manually.
Most tools also offer different project viewing options, such as lists, tables, timelines, Gantt charts, or Kanban boards. Whatever option you prefer, being able to monitor your project in real-time is key so you can switch gears in a timely manner and give status updates to your clients at any point in time.
In order to make sure you effectively monitor your project, we highly recommend having regular moments planned to review the progress made.
You can do this by setting milestones or defining different project phases along the project timeline. Each time you reach the end of a project phase, you can compare the estimated cost of that phase with the actual costs and discuss any discrepancies.
Besides comparing estimated costs with actual costs at the end of each phase, make sure you have all the necessary information to make executive decisions while moving forward.
If there are discrepancies, it’s much easier to find out when and how they occurred if you are able to look at statistics and actual data.
Compile comprehensive reports based on all the (real-time) data at your fingertips. Intuitive project management software will usually have a reporting function, automatically generating reports on various subjects.
For example, employee productivity reports show how productive each team member is according to their availability. Some project management tools even put together lengthy, in-depth reports that show you everything you need to know about the health of your projects.
If you ever find yourself exceeding your project’s budget, having these reports is also very much needed when you are asked by stakeholders to explain why.
Sticking to your original project budget is the goal of course, but sometimes changes arise that cause you to exceed the estimation.
Be it unforeseen roadblocks, miscalculations, or matters that are completely out of your hands such as a change of project scope, the next step is to determine the effects of this change on every other part of the project.
This means you might have to adjust the timeline, recalculate costs per phase, or maybe purchase additional supplies. In any event, all these extra costs need to be accounted for.
Therefore, establish a budget change process that has to be followed. This way, all stakeholders will be informed again and can adjust their expectations.
With some project management tools, each user has different system permissions when it comes to which functionalities they can use. For example, you can change the settings according to the user profile to make sure only project managers can adjust project budgets.
Keeping track of your budget and all related project expenses is as easy as Sunday morning with Rodeo. Our all-in-one project management tool is designed with the full project life cycle in mind, boasting features that support each step throughout the project.
The highly intuitive tool allows you to review data from closed projects so that you can base your project budget on past projects that are similar. Moreover, you can simply copy old project budgets to a new project for regular clients.
Once your budget is approved, you can send your estimate straight to the client with Rodeo, and use the planner to completely outline all tasks and activities according to the budget. Assigning employees and setting deadlines is a piece of cake, as is tracking time with the built-in time tracker.
As Rodeo is such an intuitive tool, tracked hours and all other project expenses are deducted from the specific project, so that you can review the impact of each activity on the budget in real-time through the reporting function.
With accurate real-time data at your fingertips, you will be able to check the status of your project at any time. Being able to switch gears and make important decisions ahead of time, will help you stay on track of your budget and maintain the profit margin you planned for.
Would you like to find out how you can effectively create and track budgets with Rodeo for yourself? Start a trial or plan a demo with one of our experts, completely free of charge. No credit card needed.