Looking to create a project budget but have no idea where to begin?
Creating a basic project budget that works for you and your client is practically an art form for many project managers.
You know that saying…
“Money makes the world go ‘round.”
It drives your decisions, influences your clients’ opinions, and is at the back of your mind at almost every turn.
But it’s about time you started ruling your budget — not the other way around.
So in this post, you’ll learn how to create and manage a winning project budget plan like a pro.
Come on. Time is money. 😉
What is a project budget?
A project budget is the total cost of all the tasks, activities, and materials associated with a client project.
Why do you want to create a project budget anyway? Because it helps you to track the estimated budget versus the project’s actual cost. And you can use it to monitor spending throughout your project and reduce the likelihood of running out of resources or going over budget.
It’s the figure you’ll find in your statement of work (SOW) that you have agreed with the client to deliver the project.
Project budget vs. estimate
A cost estimate approximates what the project (or piece of it) will cost. The budget is the final cost that’s allocated to the project.
The estimate is more of a ballpark figure, and the budget provides hard edges. You can’t go over-estimate, but you can go over budget.
Typical project costs
Pulling together a project budget will involve accounting for all (or most) potential project costs.
This is a pretty broad pool. It’s impressive how many direct and indirect costs can go into a single project.
Project costs can include the following:
- Labor costs
- Project management fees
- Contingency fund
- Material costs
- Pass-through costs (contractors, equipment rentals, print, ad spend, travel, etc.)
But material costs? Not every business has those — do they?
Material costs may not be that applicable for software development agencies. Let’s say you’re doing a public PR campaign. You’re going to need to include all physical materials in the budget.
A project budget example for a fake protest would require the included signs, cameras, and costumes.
Sound outlandish? It worked great for Salesforce.
Salesforce kicked off its entire company with a fake protest publicity stunt, with actors portraying protesters and news channel camera operators.
All of that had to be included in the budget.
With every cost included, learning to create a project budget a client is willing to approve takes some thought.
But a step-by-step guide is also pretty helpful 👀
When to create a project budget
A project budget should only be created once you know the client is interested in working with you. Don’t create a detailed project timeline and budget if the client is only shopping around for quotes.
Follow a simple process of defining the overall project budget and creating different types of estimates before you sign off on a statement of work (SOW).
Consider creating the following estimates for your next client project:
- Ballpark estimate
- Budget estimate
- Statement of work estimate
How to create a project budget in 7 Steps
A typical project budgeting process may look like this:
- Review the project scope and client requirements
- Break down the project into tasks
- Create an estimation for each task
- Add a project buffer
- Create your baseline budget
- Get approval from the client
- Track and monitor the project budget
Note: for a more thorough step-by-step guide on cost estimates, please head over to our project cost and time estimate guide.
1. Review the project scope and client requirements
The first step in managing a project budget is knowing what’s needed to be done to deliver the project successfully.
This should be done during the project’s discovery phase, and you will best understand the project scope once you’ve gathered all project requirements.
Reviewing the project scope will give you a lot of necessary info like:
- What’s going into a project (resources)
- What’s coming out of it (deliverables)
- What needs doing (tasks)
- How long will it take (timeline)
- Everything the client is requesting
2. Break down the project into phases and tasks
The key to protecting any project budget is knowing the exact tasks you need to complete to deliver the project.
Once you’ve collected all project requirements and understand the project scope, you can break the project down into manageable phases and tasks.
The best way to do this is to use a Work Breakdown Structure (WBS). This will help you uncover everything you need to know to get the project over the line and protect the budget.
But what to list? What about the little tasks? How deep to go? Check out our guide ‘Work Breakdown Structure: A Guide For Agencies‘ to learn more.
3. Create a cost estimate for each task
Now that you know what tasks are involved, you can start understanding the time and costs associated with each.
Here’s an overview of different project estimation techniques for this step.
|Three-point estimating||Combines the best-case scenario, the worst-case scenario, and the most likely scenario to get a realistic estimation|
|Top-down estimating||Looks at the overall scope and timeframe to create a high-level estimate|
|Bottom-up estimating||Breaks down the project into smaller tasks to create a more accurate estimate|
|Expert judgment estimating||Creates estimates based on your knowledge, a member of your team or an outside consultant or subject matter expert|
Say you’re using the bottom-up estimation technique. You can use the WBS template to build cost and time estimates for each task.
You can rely on your experience and team if you’ve been in the space long enough.
Alternatively, using Toggl Track, you can use historical project data to help speed up this process. You can use the Reports Dashboard to analyze what went into them, including resources, time, and cost.
This is especially great for any project work consistent in scope, hours, and effort required.
Watch the video below to learn more about our reporting features.
4. Build your project budget estimate
With your list of potential project costs in hand, it’s time to start estimating the cost of your entire project.
You can approach a budget estimate in three ways:
- Using your experience
- Using the WBS template provided
- Use past historical data to create a quick estimate
Say you used the WBS template from above. You may have something that looks like the image below.
Look at your final number and review it, and review it again. Check it for accuracy by speaking to your team and reviewing similar past projects.
5. Add a project buffer to protect profits
Not everything goes as planned, so expect the unexpected.
A contingency fund or project buffer will help account for anything that could go wrong within the project. It will be a much-appreciated cushion for minor issues and sudden changes.
- Sudden changes
- Moving objectives
- Increases in material costs
Note: we’ll take a deeper look at some of the issues above and how to deal with them below.
Your project buffer will also cover any little expense you didn’t (or couldn’t) account for — the unknown unknowns.
How much of a project buffer should you add?
Experts recommend adding about 10% – 30% to your project estimate. Check out the video below for more tips on this.
The better solution to adding buffers to your project cost estimates is to mitigate the impact of risk by estimating for it upfront.
This can be done by adding a 20% contingency fund to your estimate to account for change and risk.
Don’t build this into your estimate, but add it as a separate line item. This helps set a precedent and educates your client that changes to scope equate to additional costs from the contingency fund.
This means you can say yes to your clients a lot more, with a small caveat that you’ll be using the additional budget for it.
6. Get approval from the client
The last step in the project budget creation process. By now, you should have a total project budget you’re happy with. So it’s time to get this sent to the client for approval.
If you’re creating a project budget as part of a proposal, remember to include the following:
|Expected outcomes||Describe the client, their products, and other information relevant to the project|
|Priorities||Describe how the expected outcomes are prioritized|
|Constraints||List any constraints that the client has expressed or are agreed upon mutually|
|Deliverables||List the deliverables to be delivered as a part of the proposed solution|
|Meeting expected outcomes||Describe how your proposed solution meets the expected outcomes|
|Working around constraints||Describe how your proposed solution works around constraints|
Need a project proposal template? Download our free one here.
After the client’s reviewed your proposal/budget, listen to their feedback and make adjustments until you reach a budget that everyone can agree on.
Do clients often say your price is too high? Check out this video below.
7. Track and monitor the project budget
Getting the client to approve the project budget is the easy part. But what’s harder is ensuring you stay within budget as the project progresses.
In the agency or freelancer world, this will typically mean keeping track of costs such as:
- Your teams labor costs
- Your time — aka your billable hours and actual costs
- Your project expenses (Materials, software, contractor costs, etc.)
If you’re comfortable with spreadsheets, you may want to use this project budget tracking template to manage the overall budget.
But are spreadsheets your best option to control project costs?
Don’t get me wrong — our project budget template is solid.
But I’ve chatted with a few agencies and freelancers that use spreadsheets to track their time – and they always say how chaotic they are.
- Files get copied
- Some go “missing.”
- Formulas are unintentionally edited
- People don’t tend to fill them in all that much
- You’re unable to quickly get insights you can leverage (more on this later)
Thanks to time trackers, tracking project budgets have never been more manageable.
Unlike spreadsheets, many of the best time trackers come with features that help to automate and streamline the entire project budget-tracking process.
Using Toggl Track, you can track project performance and assess project profitability in real-time.
You and your employees can quickly start tracking your time by entering a time entry description and hitting the timer button.
It takes a few seconds to switch the timer to a different task (especially if projects and tasks are already set up).
- Type in your “time entry description”
- Find your client
- Select what “project” you’re working on
- Start the timer
Once you or your team accurately tracks time against the project, you can use the Project Dashboard to track your progress against the project budget.
Project Time Estimates lets you view whether you’re over on hours or on target based on the estimate you set. If you’ve exceeded the time estimate, the time tracked will turn red.
You will get access to several charts.
The Time Tracking Chart will show a forecast for project completion based on the project estimate and the hours clocked for that project so far.
The Billing Amounts chart shows the progress against a fixed fee amount (the project budget) set for the project.
Below these forecasting charts, you will also see a bar and pie chart representing current data containing total clocked hours, billable hours, and remaining hours (based on the project estimate).
Want to see how profitable each project is? Head over to the Insights Dashboard. It is designed to give you more details about the profitability of your projects and team members.
Why do projects go over budget?
No matter how well managed, your project budget may still face a few hiccups. So let’s look at some top reasons project budgets go overboard and what you can do to prevent them.
Additional client requests
It’s easy to get tied up in client-pleasing.
They ask for another web page–sure! They ask for another revision–you got it!
If you aren’t charging for the “little extras” you’ll risk going over budget. Because I bet you’ll still be tracking time spent on those tasks as billable, right?
You will inevitably face them. But knowing how to deal with additional requests is critical here.
Here are three ways to best handle additional requests:
|Understand the intent behind the request||Understanding why the client is asking for additional work is essential. You may realize there is a more straightforward solution you can add without additional costs to the client.|
|Accept the additional request and charge accordingly||You can accept the request and inform the client that additional resources are needed.|
|Let it slide. At no extra cost||Acknowledge that the request is outside of the original scope. But as it’s easy, let it slide and dress it up as a “favor”. Let them know that any more significant requests will have to be charged.|
It’s healthy to set boundaries with clients. Charge for little extras, or acknowledge the request and let them know it will cost extra. Communicate with them, and both parties will be better for it.
Unexpected changes can take a bite out of your budget.
These additions could be something that wasn’t included in the initial planning or a sudden need to adapt due to unforeseen circumstances.
Unplanned changes can include:
- Lacking specific resources and materials
- A team member leaving the project
- A team member was sick
- Vital tasks that were forgotten and, as a result, never added included in the budget
Protecting yourself from people leaving your business or being off sick is hard.
But you can use as much past project data and as you can get your hands on to protect budgets and profits better.
This may mean reviewing old WBSs, past cost estimates or better understanding the potential risks of each project.
All this information will help you make better decisions on budgeting for and managing your projects.
Yes, poor planning can lead to a poorly planned budget. Another disaster averted by Captain Obvious.
In all seriousness, this is a crucial point to stress.
60% of projects have a scoping document, defined methodology, and undergo risk management.
This means that 40% of projects don’t have a solid plan. That’s 400 projects out of 1,000. 💀
The best way to prevent this is to plan, schedule, and review each project. Preferably with multiple team members to get several sets of eyes on it.
Here’s a project schedule laid out in Toggl Plan.
Double-check and triple-check your project before you waste boatloads of time and money.
A session or two of reviewing a project plan will allow you to spot potential problems ahead of time and ensure everything’s water-tight.
The moving target
Goals and objectives moving constantly can de-rail any project.
You may find yourself in a situation where your trying to get a deliverable over the line, but the client keeps moving the goalposts.
Meaning you spend more time on each task than needed.
How do you deal with this?
- Stop everything you’re doing immediately.
- Get clarity from the client.
Stop all work on the project immediately and get clarification from the client asap. You’re going to burn through the budget if not.
Send them an email or give them a call and say something as simple as:
“In the interest of keeping this project on track and within budget, I need some help clarifying our goals and direction moving forward.”
You must let them know that you are mindful of their budget and time.
Spend time revisiting the project scope and SoW (your safety net) and ask the client, “are these still our goals and objectives?”
If not, then you can acknowledge the new direction and charge accordingly.
Turning projects into profit
Money no longer gets to pull your puppet strings. It’s long overdue that you control your money.
Managing a project budget is easiest when you have a wealth of tracked projects with ready reports.
For more reading on cost estimation and budgeting in project management, go check out our guide on estimating the cost of a project.
Sean is a Content Marketing Manager at Toggl and has been involved in the digital marketing space since 2017. Sean is on a mission to travel the world and fund it using his SEO and Content Marketing skills.