Put a rough project cost estimate together and send it to the client for approval–poof, you’ve got a winning project budget. Or do you?
Anyone can create a client budget for a project. But not everyone can create one that has a healthy profit margin.
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 almost every turn.
Cash rules everything around you.
But it’s about time you started ruling your budget–not the other way around.
So in this post, I will show you how to create and manage a winning project budget like a pro.
Come on. Time is money. 😉
Project estimate vs. project budget
A project estimate is an approximation, while a project budget is more of a financial plan.
Usually, a project estimate becomes a budget after the client approves the project estimation. The project budget determines the total cost allocated by the client for the project.
Note: This guide will touch on the ‘how’ of creating a project budget, but it will focus primarily on how you can better manage it.
Costs to consider when creating a project budget
Pulling together a project budget will involve accounting for all (or most) potential project costs.
This is a pretty broad pool. It’s honestly impressive just how many direct and indirect costs can go into a single project.
Project costs can include:
- Labor costs (internal)
- Contractor costs (external)
- Project management costs
- Capital expenditures
- Emergency funds
- Agency costs
- Material costs
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 👀
How to create a project budget step-by-step
|1. Review the project scope and client requirements||Review what’s going into your project and what its goals are|
|2. Break down the project into tasks||Break your project into tasks and those tasks into more tasks|
|3. Create an estimation for each task||Choose an estimation technique to assign resources and costs to each task|
|4. Add a project buffer||Add a 5% – 10% of project buffer|
|5. Bring everything together and create your baseline budget||Combine all costs so far into your initial budget and review past projects to see how it compares|
|6. Get approval||Take your budget to the client/stakeholders and get approval|
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 creating your project budget is really knowing your project scope.
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
Figuring out your client requirements should be done in the project’s discovery phase.
2. Break down the project into tasks
The key to protecting any project budget is knowing the exact tasks you need to complete to deliver the project.
Once you know the client’s goals and objectives, you can break them down into manageable phases and tasks.
The best way to list your tasks is using 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 on creating a solid Work Breakdown Structure to learn more.
3. Create an estimation for each task
Now that you know what tasks are involved, you can start understanding the time and costs associated with each one.
Since you will need to assign a time and cost estimate to each task, we will use project estimation techniques to do it.
Here’s a summary of the top project management estimation methods:
|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 (ideal when using a WBS); you’ll need data on the little things.
You can rely on your experience if you’ve been in the space long enough or, ideally, be able to sift through old timesheets and project data if you have that to hand.
But alternatively, you can use Toggl Track to pull the data up.
Go into your past projects and look at what went into them. Resources, time, and cost.
However, not every project will be suitable to base your estimate on. So stick to picking projects with similar goals, objectives, and deliverables.
4. Build your project budget estimate
It’s time to build your project budget. You should have the costs and hours estimated based on your WBS.
You can do this by using a project budget template or try using our free project budget calculator.
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
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.
- Scope creep
- 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 about 5% – 10% of your budget for contingency and taxes.
6. Get approval from the client
By now, you should have a pretty solid project budget estimate. 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:
|Expected outcomes||Describe the client, their products, and any 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 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 where needed until you reach a budget that everyone can agree on.
Wondering what to do if a client says your price is too high? Check out this video below.
How to manage and keep your project budgets on track
Getting the client to approve the project budget needed is the easy part. What’s harder is making sure you stay within budget.
This will typically mean keeping track of costs such as:
- Labor costs
- Billable hours
- Project expenses
Monitoring these will help to keep the project the project within budget.
Using Toggl Track, you can manage your project budgets in real-time. You can view your current billable amount against the project budget inside the project dashboard.
Giving you an overview of project costs and time on all your projects.
You can also dig a little deeper into each project budget and see the trendline for each one to know if you’re on track to stay within budget.
The Insights Dashboard will also give instant access to data such as total project earnings, labor cost, and the remaining budget balance.
Work with multiple contractors? Do employees have different labor rates? This can be set per project or team member within your workspace settings. Check out this ‘billable rates‘ article to learn more.
Why do projects go over budget?
No matter how well managed, your project budget may still face a few hiccups along the way. 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 is slide. At no extra costs||Acknowledge that the request is outside of the original scope. But as it’s an easy task, 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 certain 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 information as you can get your hands on to protect budgets and profits better.
This may mean reviewing old WBSs, past cost and time 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 an important 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 gonna 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 statement of work (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.
Creating a realistic and accurate budget for your project’s needs 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.