Budget overruns are a manager's nightmare. Even with all the checks and balances in place, you might still exceed the available finances. Underestimated costs can make the best idea turn into a failed project. So budgeting sometimes becomes a test for the success of a project.
Budgeting is the key skill for ensuring organizations have sufficient financial resources to execute ideas. There are only few skills as critical to running a business as project budget management.
In fact, establishing a budget is the first step you should take to ensure that your plan is reliable and can work out. It also becomes critical if you are looking into how to improve productivity in an organization.
But what is project budgeting and how can you apply it? In this article you will learn all you need to know to master project management budget planning and take your project to the next level. Let’s get started!
Project Budget Management: What Does it Consist of?
Project budget management is the process of creating a document to estimate incomes and expenses for a project during a given timing (for instance, the upcoming quarter or year). When you develop your budget, you have to take into account three main aspects: money, people and time.
- Money. Every project involves costs, regardless of its size and nature. Knowing how much you can spend sets the path for a prosperous launch. And it helps you put some order across the different phases of the project, helping you stay organized at work. Sometimes as the project evolves, the cost forecast changes, so you have to update the project planning budget accordingly.
- People. Budgeting project management also involves people. When you are managing a project budget, you have to estimate not only financial resources but also human capital.Think on how many people will be involved in the project, what is their required level of expertise and how many hours are they going to work.
- Time. Time is money, as it translates into productivity. Making sure you're not spending too much time on something unproductive will help you get better results. So having a realistic budget for project management will save you time.
Benefits of Project Budget Management
Why is managing project budgets so relevant? The most obvious reason is that an accurate budget helps you keep costs at bay. It also gives you a clear idea of the project feasibility, so you can see in advance if you can really get started with a certain project.
But there is more to it than that. According to Harvard Business School, these are five main reasons why budgeting is key for running any business:
- Project budget management helps you achieve company goals and objectives. You can use budgeting to set financial goals. And you can also apply project management budgeting methods to see how those goals evolve.
- It ensures resource availability. Project management budget planning’s primary function is to ensure you have enough resources to meet your project's goals. By establishing and organizing your finances in advance you can plan task management better and determine which teams require more resources.
- It provides a core plan. A budget is a financial roadmap for the upcoming period. It gives you a plan and shows how much you should earn and spend. The budget is updated as the project gets through that plan.
- It makes prioritizing projects easier. When you are managing a budget you have to decide which projects and initiatives come first. So having a good understanding of project vs task management is relevant.
- It can lead you to financing opportunities. Investors highly value documented budgetary information when deciding whether to fund a company or a business project, says the Harvard Business School. Don’t miss out on these opportunities! Master your budgeting skills.
Project Management Budgeting Methods
Now that you know what project budget management is and why it matters, let’s explore how to set up a budget. Here are six different methods:
- Bottom up: individual tasks add up to the overall cost of your project. Each department creates a list of expenses and cost projections, submitted for review. Cross departmental communication is used to keep everyone on the loop. Once agreed, these separate budgets are added to the company’s overall budget.
- Top down: an overall cost is set and then calculated back. In top down budgeting, the senior management prepares the budget based on objectives, and passes it on to different departments, says the Corporate Financial Institute. The departments create their own budget based on established allocation and goals.
- Parametric estimation: you use industry rates to calculate the budget. Parametric estimating does not focus on every single task, but on the most important ones within the project management framework. An algorithm is used to calculate cost or duration, based on data and parameters.
- Analogous estimation: you compare to similar past projects to calculate the budget. Analogous estimation relies on expert judgment rather than data. It uses experiences from previous or similar projects, comparing its duration, budget, size and complexity, among other characteristics.
- Three point estimate: you calculate the budget based on risk analysis. This technique determines the probable outcomes of future events. It is established through three main points: the best-case estimate, the most likely estimate and the worst-case estimate.
- Earned value analysis: you make a comparison of budget and past projects. “Earned Value Analysis (EVA) allows the project manager to measure the amount of work performed on a project beyond the basic review of cost”, explains senior manager Reichel Chance from the Project Management Institute.
Common Reasons for Project go Over Budget
How can you fail on your project management budget planning? When something in the project goes wrong, time and money have to be invested to direct it back on the right track. So execution mistakes - either they are small mistakes or fatal errors - can induce a significant risk of surpassing the estimated budget. These are some of the main mistakes:
- Poor planning. A recent PwC’s Cloud Business Survey showed that just 17% of chief risk officers are brought into projects at the planning stage. Most come to the table much later, which often results in poor planning and bad budgeting.
Poor organization of a project can make activities take longer than expected. There might be new activities that were not accounted for, or accounted activities that ended up not being relevant. Poor planning can make you waste resources unnecessarily.
- Lack of coordination. This often happens when people lack professional communication skills, or when cross functional collaboration is not taken into account.
For instance, if employees engaged in the project do not fully comprehend its objectives and tasks, they will tend to make mistakes. In turn, managers will demand revisions and corrections, so things have to be remade multiple times. Hence, inadequate stakeholder communication may lead to cost overruns.
- Project changes. Since the business environment is highly dynamic, changes in projects are usually hard to get away from. This happens, for example, when the end deliverable of a project suddenly changes to something else. These changes can affect the whole project budget management plan.
- Scope changes. The unchecked growth of the project’s scope is a massive problem for project managers. It happens when a project becomes much bigger than expected. Or when some parts that were initially not considered important are added. This occurs if a project’s complexity has been underestimated.
Best Practices for Managing Project Budget
So how can you prevent going over budget? In the following you can find five project budget management best practices for maintaining your project budget under control. Try them out:
- Review frequently. Have an overview of tasks with deadlines to make sure that the work gets completed on time. It will not only help you manage your budget, but also have a better understanding on how to improve work performance.
Use Rock to review and prioritize tasks. Move the project’s tasks to a calendar view to see the starting dates and deadlines more clearly.
- Clear overview of progress and costs. In the Tasks mini-app on Rock, use labels, custom fields, lists and statuses to stay up to date on the progress and costs of your project.
The board view in the Tasks mini-app can help by visualizing how the project and its budget are developing. It gives you a clear overview and reduces potential contingencies.
- Implement a Project management framework. You have to choose the right framework to manage a project successfully. Set up a system with rules for everyone in your team to know which tasks they have been assigned. Agile can be good to deal with scope changes. Check out our previous article on Agile vs Waterfall to learn all about this method.
- Enact transparency. Make sure that all team members can clearly see how far the project is getting along, and whether something is taking too long. It will allow you to have more control over your budget. A better transparency will reflect on a more organized project planning budget.
You can use the Notes mini-app on Rock to share relevant information about the budget. This way everyone involved has a quick access to information.
- Communicate clearly. Better communication usually results in more structured budget information. Use clear, well-documented channels to communicate challenges and accomplishments. Also, don’t forget to foster cross departmental communication.
Rock can help to keep your communication structured and in one place. Use chat, polls, or meetings to have quick interactions. You can also use the Topics mini-app for more in-depth and structured discussions.
Software Picks to Make Sure Work Gets Done While Staying in Budget
Which software can you use to avoid last minute surprises on your budgeting? Try out the following remote work tools:
- Rock. We have already given you some tips on how to use Rock for managing project budgets in the best possible way, but there is more to it.
Something to highlight is Rock’s all-in-one project management functionality. Combine messaging with tasks, notes, files, topics and meetings to keep your whole project budget management in one place. Instead of using many different apps, you can use the same platform in a more organized way.Set up your budget and get everyone informed without having to switch between different apps.
- Loom. Loom complements Rock and it can be used to provide feedback in asynchronous work video format. Rock has a Loom integration, so you can share Looms on Rock easily.
Use Looms for different parts of the project budget management process. Share information with your team about the different stages of the project and the budget prospects. Send and record videos at any time, so people can watch them as many times as they want to and leave comments if something is unclear.
- Google Drive. You can connect Google Drive with Rock. Integrate your files to the Files mini-app and have easy access to them. All your project budget related documents will be accessible to everyone in the platform. Learn about what file management is and make your work easier.
- Notion. Just like Google Drive, you can integrate Notion to Rock to work on your budget plan and get everyone on the same page.
Through this integration, teams can connect all necessary documentation from Notion to Rock more efficiently.
Use Rock to Keep your Project Budget Management in One Place
Rock can help you to plan your budget effectively! Stay on track by sharing information and communicating about the budgeting project management process with your team on Rock.
Integrations such as Loom, Google Drive and Notion will allow you to manage all the budget information in one place. Spend less time switching tools and focus on finishing the project within your budget successfully!