Project Finances for Project Managers

What is Project Budget?

There are multiple interpretations of the definition of Project Budget. At Easy Projects, we use the following description:Project Budget is the amount that the final Project Cost should not exceed.

In other words, Project Budget is a Planned (Budgeted) Project Cost.

Naturally, once a Project Manager sets a target for their Project Budget, this target should be compared to the EAC Project Cost. As a Project Manager, you want to make sure that your project stays under or on budget: Project Budget – EAC Project Cost should be equal or greater than zero. This difference is usually referred to as Budget / Cost Variance.

Budget / Cost Variance

If your Cost Variance is negative, it means that you will be over your allocated budget when the project is completed. You need to mitigate this risk as soon as possible or prepare for a tough talk with the project stakeholders.

How to Calculate Project Budget?

Sometimes you are given a fixed project budget that you have to work with. If that is the case, congratulations, your job just got easier (spoiler alert: it did not).

More often, especially with billable projects, you need to calculate your project budget (internal planned cost) to prepare a quote for your customer. Here are the four steps we recommend following:

  • Create your work breakdown structure (WBS) (i.e. the list of tasks needed to complete the project).
  • Work with your team to estimate the time required to complete each task. Estimated time multiplied by the internal rates of team members assigned to each task will give you the estimated labor cost.
  • Add all planned expenses.
  • Some tasks might have a fixed cost, for example, if they are to be completed by vendors or contractors. If you do not want to record these tasks as planned expenses, you can add a separate budget for each such task (activity).
  • At this point, you got all the estimated costs of a project; this is what you think your project will cost you. However, it is always good to add some additional contingency padding to cover some unexpected risks.

The summary of the Labor Cost + Planned Expenses + Activities Budgets + Contingency Project Budget padding will give you the Total Project Budget or the way it is called in Easy Projects: Total Project Budgeted Cost.

Total Project Budgeted Cost

Further Reading: