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How to Create a Project Budget

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How to Create a Project Budget

How to Create a Project Budget

A post from our Project Management blog

      Written by Jordan James
Although the project management landscape is constantly changing, its statistics can make for some pretty bleak reading. It's widely known that a large number of projects fail to deliver within the tenets of the triple constraint, and the rate of project failure (and its causes) varies widely across industries. But one industry with a well-documented history of projects that run over budget is the I.T industry. According to a 2012 McKinsey report,
  • 50% of I.T projects with budgets of over $15 million dollars run 45% over budget,
  • I.T projects are delivered 7% behind schedule,
  • and I.T projects deliver 56% less functionality than predicted.
The tendency to run over budget will threaten the completion of any project and can negatively impact the company in the long run.

Business Failure
One of the leading causes of budget overrun is poor scope definition and scope creep. As unplanned work enters a project, it increases the billable hours and thus the project budget. To avoid scope creep while creating a budget that can support your project goals, here are five steps to consider:

1) Know your core costs

What will it cost you to get this project off the ground? It's important to know your project costs from initiation to delivery, including team member salaries, the cost of various equipment, additional software, and so on. Without a clear cost breakdown from the beginning, the project will soon become impossible to manage.

You can get a clearer view of costs involved by examining the project's Work Breakdown Structure (WBS). Since the WBS consists of all the tasks involved in completing the project, it can serve as a basis for your project cost estimates and budget.

2) Properly assess the risks

Thorough risk assessment is vital to the creation of your project budget. Without it, any crisis that occurs (and they will) will affect the execution of the project and your bottom line. To avoid this, make sure to determine all the potential problems inherent to your project, quantify them, and make allowances for their occurrence in the project duration.

By building a contingency allowance into the budget you can counter the effect of these problems when they occur, and increase the likelihood of having a successful project.

3) Keep your budget estimates flexible

You need to accept that most budgets are only initial estimates. With the threat of scope creep and other unexpected surprises, you will find that the project budget is subject to sudden change. This change can result in a Black Swan event if there is an inattentive project manager at the helm.

Being extra-vigilant about the actuals-to-date versus the initial budget versus anticipated costs at completion allows an attentive project lead to spot any inconsistencies. A prepared project manager can quickly apply necessary tweaks to the work plan, and steer it back on track.

4) Monitor your resources

To meet the project management triple constraint, you should make sure your team members are working on the right tasks and to their full potential. By monitoring resource usage at specific intervals you can check if everyone is working on their highest priority tasks while putting in the correct amount of hours.

Priority Tasks

5) Manage the project scope

If you allow any degree of scope creep into your project, you can consider your initial project budget out of the window. The tendency of some projects to grow beyond their original purview, leading to unplanned work and cost overruns will derail any project, no matter how well-planned they are.

To avoid scope creep, make sure to track everything. The budget is quite a versatile tool, therefore you can use it as a baseline to determine whether the project is on track or not.


Successful project managers aim to complete projects within the triple constraint. As you can imagine, you'll have much happier clients if the project can be completed on budget. To increase your chances of the project being done on spec and at the expected costs, you must first prepare an accurate but realistic project budget.

Smart project managers produce a draft budget first, then discuss it with the team to get additional input from everyone's work estimates. By taking their suggestions and reworking it into the work description and schedule, a more complete and accurate budget estimate can be created.

Remember to always treat project budgets as an estimate and guideline, as they will be subject to constant review and refining as the project goes on. Creating a flexible budget allows you have (and maintain) better control of the project, and increases the chance of successful project completion.

How do you create project budgets that work? Let us know in the comments below.

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