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5 Critical steps for a Project Budget?

Why make a Project Budget?

Creating a project budget is a key part of the project documentation. Why?

  • It sets the spending in advance.

  • It confirms the balance between time and money constraints.

  • Creating a baseline allows you to track over or under spending later.

Without a Budget, you will not know the project spend allowed if funds are approved, and funding is available. This is especially important if you are in a corporate setting. Confirming that purchasing can issue orders and accounts payable can approve invoices is important before starting the project.

How to start with a Project Budget?

Now that you have defined your project, you can confirm that the budget is sufficient to complete the work scoped. It can also be that the budget drives the work scope (doing the work with what is available). Either way, it is important to test that the estimated effort (staff time x rate) plus expenses and contingency does not exceed the budget available. 

A couple of points about the Budget which may be different than the rest of the project. Project Budgets may be:

  • Calculated and managed by an accounting office with reporting issued to the Project management, not by the project management.

  • Approved by managers outside of the project owner.

  • Subject to audit or oversight by other departments.

Also, Project budgets are likely to be made of several parts, some of which the project may not control. These can include:

  • “Cash” outlays for assets or expenses purchased on behalf of the project

  • “Cost allocation” for internal staff hours based on a pre-set cost basis

  • External payments for hours or fixed price work for specialized staff or consultants

  • Overhead, which is a corporate allocation of costs incurred by the company and allocated to each project based on a calculation, these costs may not have anything to do with the project directly but are part of the project budget.

Each organization will have differing rules for who makes the budget, what goes into the budget, and what base costs, cost types, and cost calculators are used to make the budget.

How to calculate a Project Budget?

Update your Planned and Actuals and Project Progress percentage. Calculate the Earned Value and CPI to assess if the project spending is on track with Project results.

In the simplest case, the project budget is the time and materials needed to complete the project's direct work and the related cost for the product's creation. On-going costs, post-project maintenance, operations, and overhead are generally not included. The Project Manager and/or Project Owner have ownership of the budget and oversight of its management. With this straightforward example in mind, a sample budget has been provided.

Create a summary to review with your Stakeholders.

As shown here, at the start of the project, a Budget is made up of expected expenses, cost allocations, and asset purchases. All project budgets should also include a contingency. Sometimes contingencies are detailed into sub-types to better track these costs and timing risk to the overall project.

Budgets are often compared for overruns and “health check” using an Earned Variance (EV) and Cost Performance Index (CPI). EV calculates the value created by the project versus the actual costs. CPI is a ratio to assess the performance of the Project spending. If less than 1.0, the Project is over budget.

In this case the variance refers to the amount of Value created by the project versus the amount spent by the project. relates to the sum of the actual spending plus the remainder of spending estimated or accrued at the project completion.

This variance will change over time. As it does, the contingencies will change as they are used against the budget variances which occur. In this example, $40,000 of the contingencies has already been allocated due to staff overruns to ensure the budget line items do not exceed the total budget. However, based on the timing of the Earned Value would have allocated $55K, so the budget from a contingency stand point, is still on track.


Staffing is Summarized for review and a ‘sense check’.

Review the staffing mix to ensure the right level of skills mix and stakeholder oversight is balanced give the project scope, timing and complexity.

Add the expected rate by role which is calculated based on the Staff Plan data generated. Review for reasonableness and compare to expected total budget staff costs.

How to make sure your Budget is on track?

by using PMBOK Project calculation models

How the Project Values are calculated

Column C — Planned Value is the total cost of the project to date (note the full project budget should be calculated by month to allow for this)

Column D — Earned Value is the value of work completed to date

Column E — Actual Cost is the point in time costs incurred to date

Column F — Cost Variance is the difference between EV and AC.

CPI is the ratio between EV and AC, 1.0 ratio = is cost = work.

In summary: these calculators help understand the value the project has realized against costs. This can be misleading when costs are not always aligned to a percentage of the project value. However, this is a good indicator of the project direction. The CPI in this example is .809 (the project is over budget)

For more on the PMBok cost calculations, you can go to PMI's link here. However, you may need to access the PMBok in full to get the detailed calculations.


Depending on the project, organization, and how the project steering committee wants to handle budgets, either the Budget Variance or Cost Variance approach may be used.

Note: the Budget example has been presented in excel. This is sufficient for a small budget. However, for larger, more complex project budgets, a more sophisticated accounting or project cost system will be required. The accounting department will track costs and the Budget Variance. The project will likely need to maintain and track the Cost Variance. This is generally preferred since the project will be accountable for the spending and must report directly to the steering committee on the project status

Project Success is made easier

Do you want to get access to templates used in this blog? Download my free Project Managers Toolkit from this blog that tell’s you more about it.


Would you like me to share more examples of the PMI PMBok calculators or some other aspects of the budgeting process?

If so, let me know in the comments below. If you’d like to get the detailed examples of budgets and the calculations, see the welcome page for details on how to get my free ProjectManagers Workbook.