Accurately estimating a budget is a cornerstone of every successful project and can determine the success of your entire endeavor.
In this article, we'll explore the essentials of project budget estimation, offering key insights and strategies to enhance your proficiency in this critical aspect of project planning.
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We’ll also share a step-by-step guide on crafting a precise project budget estimate, together with a free project budget template.
FREE SIMPLE PROJECT BUDGET TEMPLATE
But before we delve into how to estimate a project budget, let’s give you a rundown of the basics.
A project budget is the sum of money devoted to successfully completing a project. The budget can be based on project cost estimation, set by the client or the company working on the project. This estimation serves as the guideline for resource allocation and expense management during a project's life cycle.
The project budget represents the maximum amount of money a company is allowed to spend on any given project, and there’s usually a deadline or a specific time frame for spending the money. The project budget can comprise different components, such as:
A budget estimate is an estimation of expenses associated with a specific project. It’s a preliminary evaluation of all the financial requirements of a project and a precursor to forming an actual project budget.
A budget estimate is a basic guideline with some leeway, while the project budget offers strict directions and allows for no slack (at least in theory).
Creating a project budget estimate can help you predict and quantify the resources you’ll need to complete a particular project successfully. A budgetary estimate considers all possible project expenses and uses that data to calculate and determine the project budget.
Let’s take a look at the five key steps to make precise project budget estimates.
The first step to ensure your budgetary estimate is as accurate as possible is to break down the entire project into smaller tasks from start to completion and assign a cost to each task separately.
For example, let’s say that your project is developing an app. The tasks required to finish the app could include:
Now, obviously, the project you’re making an estimate for won't include these exact tasks and might not be that simple to break down, but the main idea is still the same. Instead of making one big budget estimate for the entire project, you can make a number of small ones for each task.
When you break down a project into individual tasks, you can get a clearer picture of how much each task takes to complete and add those numbers when creating your final budget estimate.
Another benefit of breaking down a project into tasks comes into play when you assign tasks to your team members (Step 6). This allows you to monitor their workload and the progress they make on individual tasks more efficiently and ensure everything is on track (i.e., your team members or employees are doing what they’re supposed to do).
Bonus tip: Try to include things such as meetings, sending emails, and overall client management in your budgetary estimate. They might not always move the project forward, but they still take up manpower to complete and are a necessary part of every project.
After you’ve done that, try and figure out all the resources you’ll need to finish the project (e.g., tools, software, and such). Whether you have all the right tools and equipment needed for the project or not can affect the budget estimate in a couple of different ways:
In this step, you need to identify the team members with the right skills for the project you’ll be working on (i.e. making a budget estimate for) and find out whether they have free slots to do the work.
To do this successfully, your best bet is to employ a capacity planning strategy. This method helps you pair up free employees with adequate skill sets with the particular tasks within a larger project.
Capacity planning allows managers to calculate the absolute maximum number of work hours their team is able to put into the project within a specified time frame. It shows whether:
The most commonly used capacity planning strategies are:
The lag strategy relies on procuring enough resources to fulfill the actual demand, as opposed to acquiring resources based on demand estimates. This is a strategy utilized mainly by smaller firms with smaller workforces and with the goal of operating at 90-100% capacity.
The lead strategy is considered by many an assertive approach to capacity planning. Its goal is to accumulate enough resources to fulfill potential estimated demand. The way to achieve this is by making an upfront expenditure to increase capacity. This is a strategy deployed by companies experiencing or anticipating large growth.
The match strategy depends on both actual and estimated demand when resolving capacity issues. It’s right in between the two previous strategies —you neither wait to expend all your resources to invest in capacity nor invest too much in anticipation of future growth. It considers actual real-time demand and uses it to enact small incremental changes to capacity.
Before you can start calculating expenses to make a budget estimate, you determine the time it will take to finish individual tasks.
When estimating the time of individual tasks, team leads tend to underestimate how much of it their teams would need to complete their tasks successfully. This usually happens because managers either blindly rely on past experiences or have a strong desire to prove themselves to company higher-ups. They tend to push the needle towards: “My team can handle anything,” even though, realistically, that's not always the case. When they do this, they run the risk of overworking their team, causing burnout.
A more successful and healthier approach to estimating task duration is using the data from the time-tracking tools and methods your company employs, such as:
Out of all these tools, the most precise one by far is time-tracking software. It’s not only the easiest, but it also provides you with the most accurate time frame for completing individual tasks.
Using time tracking software for estimating task duration relies on one simple thing – the longer you track the time of your team and the more data about the duration of different types of tasks you collect, the easier it will be to make budgetary estimates for future projects.
This will allow you to get the real picture of both the task and the project’s duration, as you can track the difference between estimated and actual time in real-time. With that information, you can adjust the task duration estimate as the project keeps moving forward.
Next is to use all your historical data and records about past projects to create an accurate budget estimate for the current project.
The data you should be focusing on is:
In case you haven’t used time-tracking tools before or don’t have records of past projects (e.g., this is your first), you have to rely on your experience and that of your team.
Communicate with them and try to discern the necessary information you’ll need to create the most accurate educated guess together. Don’t worry if you make mistakes on your first try, instead, try to learn from them and move forward.
Next, you need to combine your historical information (past data), experience, and time estimates (step 3) with the project costing method you wish to employ. Why? Before you can estimate the budget, you first need to make a cost estimate to determine expenses in the said budget. Popular methods for estimating costs include:
Analogous estimating relies on historical data from previous similar projects or professional experience as a means to help you determine expenses. It’s looked at as a “rough” estimate, primarily used when all the minutiae of a specific project are not well known.
For example, let’s say a client wants to outsource the development of a fitness app to your company. If you’ve already worked on developing similar apps, all you have to do to create an analogous estimate is look at the costs from a previous project/app and use it as your new estimate.
There are some obvious problems with this approach, as the analogous estimate presupposes that:
Although not entirely accurate, analogous estimates are a great way to determine a ballpark figure of expenses incurred during a project. And, they can be made pretty quickly.
Bottom-up estimating takes into account the time, cost, and difficulty of the required work for each individual task within the project. The best way to utilize bottom-up estimating is to use a Work Breakdown Structure or WBS.
WBS will help you break down projects into different phases, categories, and tasks, estimate costs for everything separately, and then add those costs up.
Three-point estimating incorporates three different figures to give you a more accurate and easily amenable estimate. This estimate relies on either past data or the experience of a person making an estimate/educated guessing.
The three-point estimate incorporates the following three figures:
The easiest way to implement this method is to break down the project into smaller tasks and determine the work hours needed for each scenario. For example, you’ve done some work with your team and established the following length for a specific “unnamed” task:
Once you’ve done that, there are 2 formulas that you could apply to the above numbers to get your final three-point estimate:
Optimistic estimate (O) = 10
Pessimistic estimate (P) = 17
Most likely estimate (M) = 14.5
If E is the final estimate; E = (O + P + M) / 3; which in this case looks something like this:
E = (10 + 17 + 14.5)/3 = 13.8
Beta distribution puts a heavier emphasis on the most likely estimate (M) while giving you an overall, more accurate estimate than the previous formula.
If E is the final estimate; E = ( O + 4M + P) / 6; with the numbers above, it would be:
E = (10 + 58 + 17) / 6 = 14.16
Once you’ve accounted for time, consider the following to calculate the cost of each task:
Top-down estimating is similar to analogous estimating in the sense that it also produces a ballpark estimate. But, whereas analogous focuses on adding up the duration of single tasks to get an estimate, top-down is all about looking at the project as a whole (its possible scope and length) and estimating from there.
This type of estimate can be created using historical data or by relying on the work experience of the person making the estimate. It’s mostly used by managers, stakeholders, or people familiar with what a larger scope of the project entails.
Top-down estimates are common amongst painting contractors. For example, a painter will usually give a ballpark estimate based on square footage rather than the precise cost of his supplies (e.g., paint, brushes, etc) and labor.
Now, it’s time to use the information you’ve gathered from performing Steps 3 and 4 to finalize your budget estimate.
You could also perform one final check to ensure everything and everyone you need for the project is, in fact, available, in case your company is working on multiple projects before you send in your final budgetary draft.
So, you’ve created an initial project budget estimate, assigned tasks to your team, and got the project underway.
However, budget estimates don’t stop once the project has started, in fact, some would argue they’re even more important while the project is in its execution phase. Why? They help managers keep track of expenses and monitor the gap between estimated and actual budget requirements.
Tracking the latter is a good way to improve the accuracy of future estimates, as it allows team leads to learn from it and assess different aspects involved in completing a project and leading a team. Aspects such as:
There are two main ways to monitor the balance between the estimated and actual budget: manually or with software. The first option is more time consuming and will have your head “stuck in the books.”. A digital solution, on the other hand, will save you a lot of time and will help you eliminate human error.
For example, with My Hours, you can set a project budget and automatically calculate costs from tracked time and hourly rates. You can also include additional expenses that are automatically tabulated to help you keep a close eye on your budget.
If you’re dealing with a set budget (i.e., project-based budget), you can set reminders that will notify you when you’re getting close to reaching it. This overview of your budget and costs and the information you can glean from it is a great way to ensure all your future budgetary estimates will be more accurate.
Need help creating a budget estimate? Try out the My Hours free project budget template. Use it to quickly create budgetary estimates and to get a visual representation of your resources and costs.
With quality project budget estimates, you’ll know what resources you’ll require to finish the project, keep up with deadlines, and send in deliverables on time. And, when you can accurately predict resources required to complete your project, you’ll be able to efficiently produce a work breakdown schedule, assign work to staff, and adhere to projected timelines.
Every project is prone to unfavorable circumstances and obstacles, such as inflation, supply chain difficulties, employees getting sick, and more, which can affect the project budget. All of them are substantial risk factors and can lead to exceeding the original budget or failing to reach profitability targets.
Accurate budgetary estimates take both expected and unforeseen factors into account with the aim of helping you secure your profit margins.
Budget estimates will give you a deeper insight into project tasks and the timelines in which you need to complete them. With that, you can plan and allocate all the resources needed for finishing specific tasks. You can also ensure that the employees you want working on the project possess the required skills to satisfy specific project needs and have enough free time on their schedule to do it.
Another benefit of estimating project budgets is that they can help you identify gaps in resources or capacity, which you can later fill with contractors/freelancers or other forms of outside help.
All clients value transparency. No one wants to pay good money without knowing what they will get in return.
When clients are presented with budgetary estimates, they can get the full picture and understand why certain things cost a specific amount of money.
If you’re honest and transparent upfront, clients will have more confidence in your professional experience. This can help build trust and result in a better client relationship overall.
When all of your projects are delivered within specified deadlines, and within the allocated budget, your customers are going to be pleased. It’s as simple as that. Happy customers lead to referrals or repeat business. This is the true value behind making a budget estimate!
The 50-30-20 budgeting rule recommends splitting your budget into 3 categories and distributing it as follows:
The 70% budgeting rule states that you should spend 70% of your income on living expenses, 20% on paying off debt (e.g. debt service) or savings (if you don’t have debt), and 10% on fun activities.
On average, a budget estimate should be between -10% to + 25% of the actual final budget. The accuracy of a budget estimate will depend on the type of estimate you employed. For example, bottom-up estimating will produce far more accurate results than analogous estimates.
If you want a template to easily create a project budget, feel free to use ours!
