Which are the best examples of costs that should be considered when creating a project budget?

The first project budget example is for a small construction project. You can use the following template for most of the projects. But you need to keep to one critical concept: 

You need to use Work Breakdown Structure elements here. 

It means I used a specific technique to decompose the work into the tasks. Using the concepts of WBS and bottom-up estimates is mandatory if you want to create an accurate budget. 

Project Budget Example in MS Project or Other Tools

Excel will do the trick for most small and medium projects. Moreover, you can use one sheet for one deliverable to make the budget more usable. 

Nevertheless, let me give you an example of the same project budget but in a project management application.

First of all, you can have a running list of all project resources separately. Then, you can create the resources availability calendar, specify regular and overtime rates, and contact details. 

The best thing about it:

Project schedule and budget will automatically take this information into account based on when you assign a task to a specific resource. 

Just a side note: I never call real people a “resource” day to day. I would use a name or a title. But, when speaking about an open position on your project, it’s okay to call it a resource.

It all means that you can safely move the tasks around without fear of forgetting some public holiday or extra cost of the overtime. 

Likewise, project management software allows you to allocate budget granularly to specific tasks and resources. 

Software Project Budget Example 

Let me show you a software project budget example. First, it’s essential to understand that each industry and company has a different way of estimating and controlling costs.

In software development projects, a PM usually tracks the cost of the team. This is because that’s the biggest part of running costs. 

As you see, here, we can plan and track the monthly budget in a simple spreadsheet. 

Why? 

Most of the companies use a variation of a Times and Materials contract. We bill the project owner per hour, day, or week of actual work by a resource. Sometimes clients agree to “pre-pay” for a month in advance. 

However, software projects always come hand in hand with some hardware.

IT Project Budget Example

In addition to the tracking efforts, you need to budget for infrastructure to host your software.

But there’s a catch: 

Nowadays, there are so many payment plans that showing one example is not representative. 

Nevertheless, companies like Amazon and Microsoft provide calculators for infrastructure costs:

You can use them as a starting point, but you need to make some usage predictions to ensure you don’t overrun the limits of your payment plan. 

These project management examples are excellent, but you can’t re-create them merely by looking at pictures. There are lots of considerations behind each line here. 

Let me share my tips on creating an accurate project budget. 

What is a Project Budget?

Before we dive deep into the practical aspects of creating a project budget, you need to understand what it is: 

A project budget is a tool that calculates the total funds authorized to execute the project. It contains planned expenses for all project activities, including wages, materials, fees, risk reserves, etc. The project budget is created based on the Activities List.

So, it’s not just a number, not the sum of all planned expenses. Instead, a project budget is a tool that helps you prove all the required resources to execute the work you identified. 

How to Create a Project Budget Step by Step

Please note that budgeting a project is not the first or even second step in the project management process. So, the instructions below assume that you did your due diligence in all prior processes. 

Select a Project Budget Template

As you saw from the examples, you can use excel or dedicated project management software to create a project budget.

The primary consideration is to select expenses categories relevant to your industry and niche.   

If you aren’t given a template, here’s a shortlist of possible expenses that you may need to consider:

• Salary.
• Bonuses.
• Team-building activities.
• Employee incentives.
• Outsourced labor.
• Cost of materials and equipment.
• Travel expenses.
• Risk reserves.
• Team members’ training.
• Consulting fees.
• Contracted services.
• Recruitment fees.
• Office rent.
• Telephone.
• Computer lease.
• Repairs and maintenance.
• Utilities.
• Office supplies.
• Postage.
• General insurance.
• Taxes.
• Software licenses.
• Marketing materials.
• Infrastructure maintenance.

If you want to get templates from the example above, I can share them. It’s a great starting point. 

Get Project Budget Templates

Break Down the Project into Tasks

To illustrate what I mentioned above. 

Here’s what it takes to break down the project into tasks: 

The WBS is the tool that helps you break down the whole project scope and identify all of it. It consists of big pieces of tangible results called ‘deliverables’ and smaller pieces called ‘work packages’. These all have a unique identifier that clearly states their position in the hierarchy called the ‘WBS index.’

Then can you take each work package from the WBS and break it down into tasks. 

For tiny and small projects, it might be overkill. So, you can simply list out all the required tasks. In any case, your goal is to identify 100% of the project scope (the work you need to perform). 

Identify and Allocate Required Resources

Once we know the scope of our project, we can identify what resources we need in terms of people, materials, and tools.

For each task, decide:

• What kind of expertise do you need?
• How much experience should an expert have?
• What hard and soft skills do you need?

Next, group similar tasks together and create a “role” to perform these tasks. Then, assess how many people will be needed to carry out this work. Additionally, consider whether you need a team leader. 

You will end up with a list of roles or positions on your project. For example, ten carpenters, three bricklayers, and one designer or three senior back-end software engineers. 

Just as with human resources, you need to identify the exact date when you need to get materials, tools, and equipment. 

Give your list of tasks (and the required materials and tools for each of them) to the procurement team so that they can plan accordingly. In the long run, you need to get a commitment from them to fulfill your project’s needs. Their plan will feed into your project schedule and budget.

Estimate the Cost of Each Task

If project owners pay for the whole team throughout the project’s duration, you don’t need to estimate the per hour cost of a task. Just include a lump sum of the team’s rates into the budget. You may need to adjust it based on when people actually join and leave the team, just as I showed in the software development project budget example.

If you bill the project owners on an hourly basis or a contractor does the bulk of the work, you need to estimate the cost of each task. In most cases, it is the duration multiplied by the hourly rate of those who did the work. That’s what we did in the construction project example able.

I’ll explain where to get the rates and costs later in this article.

In addition to that, you need to estimate the costs of materials, equipment, and other required services. In some cases, it’s critical to identify the dependencies and duration of tasks before you estimate the costs. For example, prices of materials and equipment may fluctuate. Likewise, it might be harder and more costly to hire people in specific periods of the year.

These are general considerations. In practice, cost management depends heavily on the industry, niche, and specific company you work in. If you are new to this environment, you need to learn the details of cost management from your peers, accountants, or leadership.

The next step is to think about other related expenses, like costs of hiring people, traveling, training, team building, etc. To make your life easier later on, link to the associated deliverables as much as possible. Don’t let the expenses float around. It will be hard to prove that you needed them to achieve the project objectives.

Add Risk Reserves

Keep in mind, that risk management is not free of charge. Moreover, it’s a part of your project. In all its aspects, it takes time and money to avoid or mitigate risks.

All your risk management activities should transform into specific tasks related to a deliverable. Or it should be a risk resource assigned to a task, work package, or a deliverable again.

If you are not familiar with proper risk management, I strongly recommend watching the video below. Otherwise, your project is doomed to failure. 

Create a Project Baseline

After several iterations of risk management activities, you will have a realistic budget. Then, if it gets the thumbs up from project owners, you get your cost baselines.

A baseline is just a final and approved version of your budget. It is fixed in stone and used as a reference point for your project’s progress. If you deviate from the baseline too much, that’s a problem you need to address. 

Without establishing the baselines, you won’t be able to prove that you are heading in the right direction. And you’ll deprive yourself of the opportunity to improve your project management approach.

In modern project management software, you can set a baseline with one click. Check the manual to find this feature.

How do You Create an Accurate Project Budget

Get the Practical Project Management Book

There are lots of prior processes that you need to implement correctly. Moreover, the project budget depends on risk management, accurate schedule, and engagement of stakeholders. 

How do you make it work together as a whole? You can learn the practical project management framework that I use from my book:

It feels like you know a lot, but everything falls apart when it comes to practice.

I know all the pains you face leading a project.
This book describes my practical framework from 10 years of practical experience. It will help you become a great project manager in real companies with real people.

Golden Rule of Cost Estimates

First of all, let’s remember the ground rule: People who will perform the work should participate in the estimation process. Additionally, if you have a procurement manager, you need to involve them. Together, they should estimate the duration, efforts, and materials required, and any other additional costs. Moreover, they may give you insights on where to get the related prices. 

If you don’t have a project management team yet, you need to find SMEs who have expertise in similar projects. And if your company doesn’t have such experts, I recommend you postpone the development of the scope and budget until you acquire these people.

Then, of course, you should let your clients know, because this represents a severe feasibility risk. You, as the project manager, can’t provide specific estimates yourself.

Where do I get Labor Rates?

Your company should have a list of possible prices for labor you use in-house on a regular basis. In addition to that, vendors have price lists.

So, the first step is always to ask your leadership about the rates. Otherwise, you need to research the market, including freelancers, to find out average rates for the required roles. You need to make an assumption here and include the “planned rate” into your budget.

Keep in mind that the rates you use here will directly impact the hiring process. For example, it may take more time to fill the required position if you put them below the market average.

A project manager often doesn’t have access to information about in-house employees’ wages. In this case, the cost of their labor boils down to reporting the working hours they spent on your project.

Where do I get Price Lists for Materials and Equipment?

A company should have a list of trusted vendors. Your first point of contact is a procurement manager. If you can’t find such a list, you need to create one. 

There’s a potential risk when it comes to the cost of materials and equipment you need to be aware of. Your estimates might not be accurate by the time you come to purchase them in, say, six months’ time. So you should be ready for price fluctuations. It might be a significant hit if you need a large amount of materials.

Moreover, serious procurement requires serious legal support. It’s one thing to hire a freelancer on Upwork. You can do that without any help. However, it’s a different story when you need materials from another country.

Why is Collect Historical Data From Your Colleagues Critical?

Your company may not have a formal archive. But other project managers have tons of information. So don’t be afraid to ask, especially if they’ve worked on similar projects.

You may identify expenses that you overlooked. In addition, these project managers may share their experience, provide you with lessons learned, and give helpful tips.

For example:

• Materials need storage. You need to rent space.
• There are transportation expenses for delivering them on time to the site.
• Machinery and tools break. They might need replacing.
• Most applications require licenses. These can be expensive for commercial use with big teams.

Remember, every project has a unique set of additional expenses.

How to Budget Variable Costs

Costs like electricity and phone bills, file storage space on a server, etc. can vary over time. You need to budget accordingly. Again, historical data and other project managers will give you an idea of what you can expect.

Reserves for Unknown Risks

When you sum up costs for all activities, you’ll get a budget for work packages.

When you sum up costs for all work packages, you’ll get a budget for a parent deliverable.

When you sum up costs for all deliverables, you’ll get a project estimate.

When you sum up the project estimate and the total number of risk reserves, you’ll get a cost baseline. Then, you need to get approval from the project owners.

When you sum up project baseline and management reserves, you’ll finally get the project budget.

The management reserve is allocated for unexpected risks and events. Usually, it’s an additional 5%, 10%, or 15% of the cost baseline. But, keep in mind that you don’t have direct access to these reserves. You’ll need approval from clients or the steering committee to use them.

The problem is that this approach is purely theoretical. Companies rarely break down a project budget in this way. So, the takeaway here is the buffer that you need to have in your budget. Even if you performed all risk management activities, you need reserves for entirely unexpected things. And they will undoubtedly happen.

Funding Requirements

And that’s not all either. You need to provide a funding schedule. Don’t expect that you’ll get every penny on day one. Most likely, the project will be funded in installments.

You need to ensure that you have enough cash to keep the project running every day. You should pay close attention to when you need to purchase materials or pay vendors. Don’t put your project on hold just because you’re waiting for the next installment.

If you have cash flow constraints, you need to consider these as part of the whole project plan.

Harsh Truths

Sometimes, clients and your leadership will ask you to provide a project budget when you don’t have a project team. Likewise, they may not give you enough time to prepare with due diligence.

You just need to provide them with a number (total project budget). So, if you are not able to convince stakeholders to do it the right way, you need to safeguard yourself and the project team. Provide higher-level and rough estimates based on the worst-case scenario, especially for deliverables that you have little certainty about.

Yes, sometimes that means that you need to double or triple estimates. To be ethical and professional, you should be transparent about the accuracy of these estimates and offer to provide more specific estimates later in order to come up with a more accurate budget.

Project owners like to constrain the budget. And they believe that it’s feasible to achieve project objectives with this budget. But don’t take it for granted. Sometimes, you need to prove that the budget, stated in the project charter right at the beginning of the project, is insufficient. Again, the more you involve stakeholders in the planning process, the easier it will be to prove your point. 

It feels like you know a lot, but everything falls apart when it comes to practice.

I know all the pains you face leading a project.
This book describes my practical framework from 10 years of practical experience. It will help you become a great project manager in real companies with real people.