A Quick Guide to Calculating a Project Budget

Tired of projects going over budget?

You’re definitely not alone.

Many project managers struggle to calculate a project budget accurately.

In this blog post, I’ll break down the steps for estimating and calculating a project budget that will keep your costs on track.

Whether you’re a seasoned project manager or just starting out, these tips and tricks will help you take control of your finances and ensure the successful delivery of your next project.

Let’s get started.

Why should I calculate a project budget?

Sticking to the original budget is one of the crucial indicators of project success, the others being on-time delivery and adherence to the scope of work.

But, many projects experience scope creep and are not completed within the budget. A study by PMI (Project Management Institute) shows 38% of projects do not stick to the planned budget.

Source: PMI

Cost overruns, apart from the obvious additional cost, have other hidden costs in terms of:

• Loss of profit
• Contractual disputes with clients
• Suboptimal quality of work as a result of lack of funding
• Stress
• Bad reputation
• Delay in getting funding approvals

Above all, with multiple challenges, such as a decline in venture funding, inflation, talent shortage, and rising interest rates, businesses that want to stay competitive simply cannot afford project cost overruns.

From breaking down tasks to identifying all necessary resources, I’ll provide tips and tricks to help ensure that your projects stay within budget.

Here’s a step-by-step guide on how to estimate and calculate a project budget.

1. Define The Scope Of The Project

Before calculating your project budget, the first step is to determine the project’s objectives, deliverables, timelines, and other essential details that can affect the project’s budget.

The project scope statement will answer these questions:

• What is your client looking to achieve with the project and why?
• Who are the stakeholders involved in the project?
• When does the client expect you to complete the project?
• What are the deliverables of the project?
• Where will you carry out the project?
• What are the project constraints and exclusions?
• What are the acceptance criteria for the project?

You can use an Excel/Google sheet or pre-built project management templates such as these to define the scope of your project:

Here’s an example of the project scope statement you must write before calculating your project budget.

Project Purpose:

To construct a custom home within six months.

Project deliverables:

• A 2,500 sq. ft, 3-bedroom, 2-bathroom finished home
• Insulated garage
• Programmable gas furnace
• Kitchen appliances will include a microwave, dishwasher, oven, and range.

Project milestones:

• Approval of permits: On or before May 5
• Foundation: June 14
• Mechanical, plumbing, framing, and electrical inspections: July 25
• Final inspection: August 10

Specifications:

• The home must be built in line with seismic stability codes and local building codes
• Windows, doors, and appliances should meet Energy Star and NFRC energy ratings
• Floor and ceiling insulation must meet the prescribed R factor

Exclusions:

• Landscaping and interiors
• Air-conditioning
• Refrigerator
• Swimming pool

Whether you need to conduct a CRO audit, create a brand ambassador program, or undertake other digital projects, you can follow the same steps to write your project scope statement.

2. Breakdown of the project tasks

Now, before I talk about how to calculate a project budget, it’s essential to go over the different ways to estimate project costs.

Some of the most common methods include:

• Analogous estimating: Here, historical data from similar projects is used to calculate the project budget. The estimate assumes that the current project will be similar in scope, complexity, and other factors.
• Bottom-up estimating: This involves breaking down the project into smaller tasks or work packages and estimating the cost of each one.
• Parametric estimating: This involves using statistical data to estimate costs based on a specific set of variables, such as cost per unit, cost per hour, etc.
• Three-point estimating: Here, you estimate the pessimistic cost, optimistic cost, and the most likely cost to calculate the total cost.
• Expert judgment: In this method, project managers consult experienced professionals or subject matter experts who give an estimate.
• Vendor bid analysis: This involves getting bids from potential suppliers or vendors for the materials/services needed for the project.

Which is the best method?

The bottom-up estimate is known to give the most accurate project cost estimate.

Going by this method, you’ll need to break down the project into smaller, manageable tasks using a task management tool to achieve the project’s objectives.

To take the example of a construction project again, the individual tasks can look like this.

Source: Agile PM Training

One way to easily and quickly add tasks and dependencies is to use Gantt chart modules like this.

3. Identify The Resources You Need

To calculate a project budget, you need to estimate the costs of resources such as software, materials, personnel, and equipment.

Identify the resources you may need to ensure you calculate the project budget accurately, such as:

• Labor: The salaries, wages, and benefits for your in-house project team members and any contractors/subcontractors or consultants you hire.
• Materials: The cost of raw materials or supplies you need for the project.
• Equipment: This can include specialized tools such as video editor software, computers, vehicles, machinery, software license fees, etc.
• Facilities: This includes the cost of renting or leasing any facilities needed for the project, such as office space, warehouses, or production facilities.
• Travel: The cost of any travel required for the project team members or stakeholders, such as airfare, lodging, and transportation.
• Communication: Think about the cost of the communication tools such as Slack, telephones, internet access, or video conferencing software.
• Overhead: Indirect expenses related to the project, such as utilities, permits, licenses, insurance, or administrative costs.

Be sure to list the exact number/quantity of resources you need to calculate the project budget accurately—also, factor in the wastage and any extra cost you are likely to incur.

4. Calculate The Cost Of Resources

The next step in this guide on how to calculate a project budget is to estimate the cost of resources.

Here’s how to do this.

For equipment, machinery, or software that you will purchase, you can contact suppliers and get estimates.

For other tasks, determine the total labor cost (or ‘fully loaded cost”) involved in completing the project.

Fully loaded cost is the total cost of a resource, including both direct and indirect costs associated with hiring and maintaining that resource.

Direct costs include salary, benefits, bonuses, and paid time off. Indirect costs include payroll taxes, unemployment insurance, workers’ compensation insurance, and overhead costs.

For example, let’s say an employee earns $50,000 a year and works 8 hours daily for five days a week (40 hours/week or 2,000 hours a year).

The employee’s hourly rate is:

$50,000 / 2,000 hours = $25 per hour.

Now, add up the direct costs such as:

• $8,000 in benefits
• $4,000 in bonuses
• 10 days of paid time off (80 hours).

Total direct costs are:

$50,000 + $8000 + $4,000 / 2,000 hours = $31 per hour.

Factor in indirect costs such as payroll taxes, unemployment insurance, and worker’s compensation which in this example comes to $4 per hour.

Total costs are:

 $31 + $4  = $35 per hour.

An easy way to estimate resource costs to calculate your project budget is using timesheet software to log work hours.

Before calculating resource costs, assess the available capacity with smart resource management software.

5. Factor in Indirect And Unexpected Costs

Both indirect costs and contingency costs come into the picture when you want to calculate a project budget.

Contingency costs are additional funds set aside to cover unexpected expenses or changes in the project’s scope.

Indirect costs are expenses not directly associated with specific project tasks but still contribute to the overall project budget. For example, total indirect costs in a manufacturing unit can include the following:

• Depreciation cost of machinery and building
• Repairs and maintenance
• Factory supplies
• Quality audits
• Insurance

Depending on the project and the industry, the amount you need to set aside for unexpected costs while calculating the project budget can range between 10 and 30%.

In general, complex and longer projects can have higher cost overruns, as do industries that experience higher fluctuations in labor or material costs.

6. Calculate The Total Project Cost

Once you have determined the direct, indirect, and contingency costs, add them to the total project cost.

The final picture can look like this.

Source: Project-Management.info

Or, you can use a ready-made project management tool such as Paymo to create project retainers or send quotes, estimates, and invoices.

In Paymo you can easily convert a Project into an Estimate.

7. Review And Refine

Once you calculate the project budget, you’ll need to review it to ensure it is accurate and realistic.

Refine the budget if necessary by adjusting the scope, resources, or cost estimates.

Use the right project management tools to track and monitor your project, including employee productivity, income, and profit, to ensure that the project stays on track and within budget.

Of course, don’t forget to control business spending to maximize your profits!

Wrapping Up

Estimating and calculating a project budget can be daunting, but with the right strategies and tools, it is possible to estimate your project’s costs accurately.

Be sure to research the expenses such as labor, materials, equipment rentals, taxes, insurance, and more to create a realistic budget that will help ensure your success.

With these tips in hand, you’re now equipped to accurately calculate the project budget for any upcoming project. Good luck!

First published on March 27, 2023.