5 Ways to Manage Your Project Budget Effectively

No company has an unlimited budget, so when it comes to making a project a success, avoiding an overspend is key. Stakeholders will often look to budget management first when they are trying to gauge if the project was a success or a failure.

Because of this, budget management often plays a large part in Project Manager jobs. That is why we have looked at five ways you can take control of your project budget before you fall victim to overspending:

Budget for the Unexpected

This may sound like an impossible task on the surface, but you just need to be realistic when it comes to estimating costs. Make sure you get input from all related stakeholders to help you with your estimates. You also need to build in contingencies by factoring in things that are outside of your control, such as financing, labour costs, anything that may impact the pricing of supplies, currency exchange rates and so on.

The price that you have today may not translate through the rest of the project, so where possible, try and make sure vendors can deliver on their promises and have a backup plan just in case. Vetting suppliers and vendors, as well as getting input from stakeholders, can go a long way to setting a more realistic budget that can be met, even if there are unforeseen conditions that impact costs.

Understand True Wants and Needs of Stakeholders  

It is important to get the true wants and needs of the stakeholders from the start. Quite often, what stakeholders say they need or want in a project isn’t as simple as it may seem up front, which can lead to unclear expectations and goals on both sides.

If everyone involved in the project does not have a grasp on the true desires of the stakeholders, it will be near impossible to identify the true requirements of the project. As a Project Manager, time must be invested into understanding what the stakeholders expect, as everything, including the budget, is ultimately defined by the expectations of the stakeholder.

One of the first steps should be to ensure the requirements of the project are identified accurately, then confirmed and documented with all stakeholders. These should then be communicated to all parties involved to ensure everyone is on the same page from the start.

Keep Everyone Informed

Following on from what we mentioned above, making sure all team members are aware of the current budget status is very important, so keep them up to date with budget forecasts.

Having a team that is involved in every stage throughout the project will result in a team that are more likely to watch the costs of their areas of responsibility carefully.

Develop Relevant Key Performance Indicators

A project budget cannot be managed effectively without key performance indicators (KPIs) being set. KPIs help you to determine how much has been spent on the project, how much the actual budget differs from the planned budget and more.

Some of the commonly known and used KPIs relating to budget management can be found below:

Actual cost (AC) – actual cost of work performed shows how much money has been spent on a project to date.

Cost variance (CV) – shows whether the estimated project cost is above or below the set baseline.

Earned value (EV) – also called the budgeted cost of work performed; this shows the approved budget for performed project activities up to a particular time.

Planned value (PV) – also referred to as the budgeted cost of work scheduled; this is the estimated cost for project activities planned and/or scheduled as of the date of reporting.

Return on investment (ROI) – shows the profitability of a project and whether the benefits have exceeded the costs.

Review and Re-forecast Often

 A project that is left to its own devices to run, without budget management and re-forecasting, will fail. It is essential that budgets are often reviewed to prevent overspending. At the end of the day, a 10% overrun is far easier to correct than a 50% one, and if you are not careful, that 10% can turn into 50% in the blink of an eye. Your chances of keeping a project on track are increased with frequent budget reviews, rather than just forecasting budgets at the beginning and forgetting about it.

As well as constantly revisiting the budget of the project, resource usage needs to be monitored and reviewed often, since the people working on a project will contribute to the overall cost.

Project Managers should review the number of people working on a project and the future resources needed on a weekly basis. Doing this will ensure that the resources you have are fully utilised while ensuring you have the right resources ready for the rest of the project. Revisiting the resource forecast on a regular basis will help to keep your project’s budget on track.

Scope creep is another area that must be closely monitored and reviewed by the Project Manager. Carefully managing scope is important, as it is one of the leading causes of going over budgets; unplanned work will find its way into the project, which can cause billable hours to creep up. By creating change orders – additional funding for the project to cover the cost of extra work – for work that isn’t covered by the project’s initial requirements, it can help to keep the project on budget.

The budget must be a “living” element of your projects and something that is reviewed by all relevant parties on a regular basis. Project Managers who carefully monitor budgets throughout their projects will keep management and stakeholders happy, therefore experiencing greater success in both the project and their overall career.

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