We are all familiar with the age-old adage — “There is no such thing as a free lunch.” Even projects that a company completes to increase revenue and profitability come at a cost. What’s that cost? It’s the project budget.
Did you know that only 34% of companies are able to consistently deliver a project on budget. In the construction industry, whooping 85% of projects go over budget! An accurately calculated project budget can be the deciding factor between a project being a hit or miss. We would say it's one of the top most crucial things in project management, alongside resource allocation.
Learn what is a project budget, how to set one and how technology can be used to your advantage when it comes to project tracking. Read along.
A simplistic explanation of a project budget is that it accounts for all the expenditures of a project (for resources, training, travel, materials and operations). However, there is more to it. A project budget not only factors in expenditures, it also entails securing the funding that gets the project rolling (who or which department will support the project and when). Lastly, it sets a baseline for performance. Once the budget is set, you actually have quantitative data against which you can track, control and check costs.
The project budget has the most direct impact on a company’s financials. When a project budget is created with details and realistic estimations, it can lead to increased profit and operating margins. The more accurate the budget, higher the possibility of the project going as per plan. We all want that, don’t we?
Project budget tracking can also be used as a communication tool — one that provides a status update to all stakeholders on how a project is progressing. It can also be viewed as a decision making tool. Based on the project budget tracking, a company is able to calculate ROI (return on investment). With this report on ROI, upper management can take a call if adjustments need to be made.
Lastly, having a project budget tracking tool provides transparency within the organisation as a part of this process is identifying where and how the funds will come from (will it be from a certain department, if yes and why). It also provides clarity on how these funds will be used — which resources are being assigned and what are their associated costs. With a project budget tracking tool, the financial books are clear and without any ambiguity.
Number crunching can be tricky for even the best of us. But, our step-by-step guide for creating an agile project budget is there to simplify this somewhat intensive process for you.
Here’s what you need to do to get your budget tracking framework working like a well-oiled machine.
Identify Objectives & Goals: The first step in creating a project budget is to know the exact project goals, milestones and tasks. What is it that the project requires and what steps have to be taken to ensure it’s completed. Many companies look at this part as creating a task list.
By formulating this task list, one will get a strong grasp on which resources will be required and when they’ll be required.
Create Estimates: Once a task list or project scope is finalised, you’ll move on to creating an estimate for each. There are two ways to approach project budget estimates. A bottom up or top down approach.
Bottoms Up Approach - In this method, the entire project is broken down in minute tasks, milestones and phases right in the beginning. This approach gets you to identify the tiniest details of the project and ensures you account for almost everything. However, the flipside of this methodology is that it’s not only time consuming, but frequently a lot of tasks are added once the project has begun, which makes tracking and monitoring difficult.
Top Down Approach - The top down budgeting approach is typically used when there is a fixed number or price at play. In this, the bigger project budget is set in stone and then it’s broken down into phases against which finances are allocated. The main challenge with this approach is it’s difficult to account for all the cost variables when the project scope or plan is unclear.
For both of these methods, there are again multiple ways to arrive at the estimates. You can use historical data and experience from similar projects or get information from experts. One can also use statistical softwares to arrive at estimated costs. Lastly, one can go out to the market and collect data on resources and capital expenses. Whatever method you choose, it’s best to have a second level of cross-checking for all the numbers.
Tip - We recommend accounting for market variables, contingencies and taxes while creating these estimates. Sometimes, you can even have two options for a cost, one as a best case scenario and one as the worst case scenario.
Get Budget Approval: Once the budget has been created, it needs to undergo an approval process with the key decision makers. This process of sharing the budget with key stakeholders is crucial because it keeps them informed and also gets them on board.
This approval process is critical because the project budget is also a dynamic document; one that needs to be revisited and updated as a project progresses. If certain costs are escalating, the stakeholders which are involved can make adjustments. But this can only happen if you have gotten approval beforehand.
Set Up Project Budget Tracking: It’s great to have all the estimates and task lists created, but the job isn’t quite done yet. It’s equally important to track the project budget once the project begins. A project manager also needs to identify when and how often they are going to monitor the budget.
Tip: Experts suggest monitoring the budget at least once a week rather than at the end of the month. It’s easier to fix a 5% budget overrun than a 20% budget overrun at the end of the month.
Many times, a project budget is tracked with spreadsheet templates. This method can get challenging and messy. And, let’s not forget this manual tracking process is quite cumbersome because we know these spreadsheets require a lot of customisation.
Using a project management tool can help automate project tracking. With eRS, you are equipped to track project budgets by tasks, managers, project phase and even individual resources. The visual software also makes it easier to track custom billing rates. A project management software with budgeting features will make project budget tracking more precise, accurate and dynamic.
Create a Communication & Change Process: As mentioned earlier, the project budget is not a static document. It needs to be revisited and updated as the project progresses. These changes need to be communicated and approved. A few things to do while creating a communication and project budget change strategy are:
Does the thought of creating and managing a project budget for multiple projects create stress and anxiety? We understand — numbers can be complicated for a lot of people. But, there is no need to panic. eRS, an end-to-end resource allocation and project management tool can help you track global project budgets and manage financial expectations.
With eRS, you have accurate project data on your fingertips. Our software provides real-time status reports on billings, planned vs actual expenditures and profitability. These financial reports can be customised at various levels — by resource, task, client or project. eRS also lends itself to helping you create agile budgets for global projects. These budgets can be shared with associated stakeholders with just a few clicks, it’s really as simple as that.
And the features don’t stop there, eRS can also help you identify and allocate resources, manage global projects and plan for future projects. It’s an all-in-one project tracking and resource management solution that will increase accountability, transparency and rate of project success. If you need some help or have further questions, our team would be happy to help.