Project budgets made simple

“Quanto costa?”

As the waiter walked away to get the bill, he smiled at me.

I felt proud. I said it so smoothly!

In the kitchen, the waiter probably mocked me. Silly tourist.

You see…

This was a restaurant in Spain. And quanto costa? That’s Italian.

I was 18 and on my first training camp abroad for the kayaking team. I had just found out that the team coach loved having a laugh with new kids on the squad.

It’s an important question though - whatever language you choose to say it.

“How much?”

A budget is a fundamental part of your project. If you don’t have one, it’s not a project - it’s just work.

So how do you make one? Let’s dive in!

Your budget will be wrong, so why make one?

The budget you create at the start of the project is an educated guess. It’ll never be perfect, we all know that.

Even your CFO knows that, although they’ll never admit it.

The game we’re playing with budgeting is to make this guess as accurately as possible, without turning the budget creation into a project of its own.

Here’s the thing…

It’s just like what we discussed a few weeks ago with planning: the power lies in the process, not in the end product.

It’s a ballpark figure that guides decision-making throughout the project.

It's the research, analysis, conversations, and questions that help you set realistic expectations, allocate initial resources, and create stakeholder confidence.

It helps you get going and prepares you for future adjustments.

Budgeting approaches

There are two main approaches to creating your budget. Last week, when we made a time plan, we worked with either fixed time or variable time.

You can read the issue on planning here if you missed it.

Budgeting works much the same way. You either fix the budget, or you fix the other variables and find out what it adds up to.

Option 1: Top-down budgeting

In this approach, your sponsor sets the overall budget for your project.

It's up to you to allocate funds to different tasks and activities.

Top-down budgeting can be efficient and straightforward, but it often lacks detail and nuance. And you guessed it, it can be challenging if the budget doesn't accurately reflect the project's needs.

Option 2: Bottom-up budgeting

Bottom-up budgeting starts at the task level. You broke down your big goal into small steps earlier, and you have a good understanding of your scope & deliverables.

You and your team estimate the costs for the individual tasks and activities, and then simply add them up.

The main cost driver in modern projects is hours, both internal and external. Other costs could include things like:

• Training

• Research

• Materials

• Equipment

• Travel expenses

• Licenses & hosting

• Launch celebration

This approach is much more detailed and accurate, but it can be (too) time-consuming and requires more input from your team.

Which one do you choose?

There’s no right or wrong way to do it. In reality, you’re probably dealing with a mix.

Your sponsor gives you a ballpark figure that serves as your starting point.

You then take a bottom-up approach and see where those two approaches meet or where there is a gap.

Those gaps are a starting point for negotiation - is there more financial room, or do you have to cut scope, or accept lower quality?

Whatever you do, always include your team in budgeting. It makes people feel heard and creates early buy-in.

Someone who was part of creating the budget wants to make it work instead of blaming “that crazy PM with his unrealistic budget”.

Estimation techniques

Both of the approaches we just discussed rely on accurate estimations. To get you going, here are two of my favorite estimation techniques:

Expert judgment

Start with your team, and add external specialists if you have knowledge gaps. Expert judgment can be really valuable, especially when there’s limited historical data or when the project is unique.

The downside is subjectivity, which is why I like to pair it with…

Historical data

If your organization or one of the involved parties has done something similar before, you’re in luck. Lessons learned are a goldmine for budgeting.

That design agency that does 3 of these projects every month? Ask them for some data!

The more reliable and detailed the data, the better insights you can draw from it.

If you have a lot of historical data, you can even use basic statistics to derive a reliable number from it.

A word on risk

Next up, you need to add some buffers.

The first one is for risk management. You’ve identified known risks earlier, and every mitigating action has a cost. These costs go into your budget.

Read more on risk management in this deep dive.

Secondly, you add a so-called management reserve.

This is an extra pot of money that you reserve for things that come up during execution but are not identified as risks. The unknown unknowns.

If you’ve ever done a project, you know that it’s a matter of time.

These will pop up.

As a rule of thumb, the more uncertainty there is in your project, the higher this buffer should be. In my experience, they range from 5 to 10%.

The management reserves are not part of your baseline budget but should be available when needed. You can only tap into these with the approval of the steering committee.

A final word of caution

Be realistic. If you decide to include a developer for $30 per hour in your budget, that means you’ll actually have to find one!

You’ll have to stand up for your team and for the project’s success. You can’t do something for 20% under budget just because that’s what has been sold.

The final and often overlooked hurdle of budgeting is getting your steering committee to sign off on it. When sh*t hits the fan down the road, you’ll be happy you did.

Putting it all together

Your ability to create a realistic budget is an essential skill that can make or break a project.

But remember, a budget is just one piece of the puzzle. It works in tandem with other aspects of your plan like scope, schedule, and expectations on quality.

The more you can discover about those before you make your budget, the higher the odds of a realistic budget.

Next time you have a project budget to make, use this as a cheat sheet:

1. Top-down guidelines

2. Bottom-up estimation

3. Add other expected costs

4. Add risk and management reserves

5. Compare, negotiate, and get a sign-off

Good luck with your crystal ball!

Cheers,

Jasper

I’ve gotten a lot of questions about the 4 core variables of a project:

• Time

• Scope

• Money

• Quality

That’s why we’re doing a deep dive into this next week. If you have any questions related to this, please hit reply so I can answer your question next week!