Project budget explained: theory and a template

Project Budget - Toolshero

Project budget: this article explains the project budget in a practical way. It starts with the theory (a general definition and meaning), followed by its importance. Next, tips are given for making a project budget and different approaches are discussed. Finally, you can find a project budget template in this article to get started. Enjoy reading!

What is a project budget? The theory

In business, usually no project is carried out without the stakeholders knowing in advance what it will cost. It is not economically responsible to start a project without the calculations showing that the project is actually worth the money.

The defintion and meaning of project budget

A project budget is a statement of all expected costs required to complete a project over a period of time. It is used to estimate what the total cost of a project will be and whether this cost is worth it. Developing a project budget is therefore a crucial part of the project planning process.

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The core utility of project budgets can be summarized in the following key aspects:

  • Project budgets are the most important part of securing project financing
  • It forms the basis of effective Total cost management
  • The budget has a direct effect on financial viability

Why is a budget important?

A budget for a project includes labor costs, material costs, operational costs and other costs. It is not a static document. This means that a budget can be assessed and adjusted several times during the implementation of a project. This is often done using budgeting software.

It goes without saying that projects cost (a lot of) money. That’s not the only reason a budget is needed. A budget is, as it were, the engine behind the project. It communicates to stakeholders how much money is needed, by when and for what purposes. Budgets are important in almost any project, but especially in industries such as construction, manufacturing, and marketing.

So a budget is not only a way to obtain resources to start the project, such as money, personnel and materials, but it is also a way to manage the costs after the start.

Tips for making a project budget

A project budget consists of many components. Examples are direct and indirect costs, fixed and variable costs. Labor, materials, equipment, buildings, licenses and much more are also part of the total project costs.

In order to meet all needs, a very accurate plan must therefore be drawn up in which no costs may be forgotten. To achieve this, several tips and phases are described below that should be considered when developing the budget.

1. Use historical data

The project that will be carried out is probably not the first project that has this specific goal. Therefore, look back at similar projects from the past and try to learn from their budgets. It’s a good way to make big strides in working on the budget.

2. Reference Lessons

There is more value to be gained from historical data than simply take over costs. It is possible to learn from the successes and mistakes of previous projects. If these budgets are clearly tracked, then it provides a clear path leading to accurate estimates.

3. Make use of experts and their knowledge

Another good way to create an accurate budget is to involve people who understand the process. People with knowledge and experience, for example an experienced project manager, know exactly how to approach these types of processes. By contacting these people, it becomes possible to stay on track and avoid pitfalls.

4. Concentrate on accuracy

The budgeting process is not finished when the figures are complete. You want to make sure the numbers are correct. Here too, use software or the help of experts. Do not check once, but several times. It will not look good if the budget immediately receives some major changes after the start of the project. Unforeseen events can always occur.

5. Keep updating

Ensure the budget is adjusted in real time using project planning software. As soon as teams change the status of tasks or budget aspects, this is visible to everyone. If not, valuable time is wasted.

So having good software is very important. It gives the project manager and the teams the right information so that any problems can be identified at an early stage.

What costs does a project budget consist of?

Below are shared some examples of different costs that can be included.

  • Human resources, such as salaries, travel expenses, meal allowance, training costs for conferences, workshops, external contractors, etc.
  • Material resources such as software, equipment, office supplies, etc.
  • Research costs such as studies or data from paid databases to support the project
  • Professional services such as legal advice, market research agencies, consultants, interim managers and more
  • Capital expenditures such as advanced equipment, technical upgrades, etc.
  • Contingencies

Different approaches to project budgeting

It can be very challenging to correctly estimate the costs for a new project. Although there are interfaces with other projects, almost every project is unique. Sometimes it revolves around the development of a new product, sometimes it concerns a service or change in the company. In short, projects are used for many things. The larger the size of the project, the more difficult it is to make accurate estimates and assumptions about how the project will progress.

There are several techniques that greatly improve cost estimation and the making of assumptions in terms of accuracy.

Bottom-up estimate

A bottom-up approach is one of the best ways to create a project budget. It involves reviewing individual cost items and adding those costs together. This makes it possible to anticipate costs on different parts of the project, such as tasks, milestones and phases. If you are confident that all costs are complete, then the bottom-up approach to project budgeting is best.

A disadvantage of this approach is that it takes a lot of time to work out all costs down to the smallest details. In addition, practice shows that in most cases the tasks within a project schedule change in such a way after the start that many of the estimated costs are no longer correct. Inflation can also cause costs to fluctuate.

During the running time of the project, the budget will therefore undergo several iterations. Uncertainty about costs decreases as the finish line approaches.

Top-down estimate

The top-down approach is the opposite of the project budgeting approach mentioned above. The process starts with the total project budget broken down into smaller parts, such as tasks or phases. As a result, for example, a certain amount becomes available for each part of the project, from which everything must be paid. Top-down approaches are preferred if a fixed price or budget has been agreed on for the project.

The main disadvantage of this approach is that it is difficult to estimate matters if the scope of the work is not yet completely clear.

Analog estimate

An analog estimate involves analyzing data from similar projects to determine the costs for a project. Experienced project managers in particular know what works and what doesn’t work. Using analog estimates, the project manager draws on best practices from previous projects to form a picture of the costs of the current project.

Parametric estimate

A parametric estimate involves using project variables to estimate total costs. Unlike the analog estimate, the parametric estimate is very accurate. The starting point is cost variables or data points from specific parts of specific projects that are applied to the current project. The advantage of this approach is that it is more accurate than an analog estimate. This is because more than one dataset is used. The disadvantage of this method is that it can be difficult to find comparable and therefore usable datasets.

3 point estimate

A 3-point estimate involves calculating the average of the best, worst, and most likely estimates. This approach is pragmatic and many project managers prefer this method. It takes into account the weighted average and encourages the user to look at the project from multiple perspectives. This makes it more likely that a realistic cost calculation will be made.

The advantage of this method is risk reduction. There are no obvious drawbacks to using this method. It generally takes more time than, say, an analog approach, but many people find it well worth the effort.

Project Budget template

Get started with creating your own project budget and use this ready-to-use template / worksheet in a .XLSX format.

Download the Project Budget template

This template is exclusively for our paying Toolshero members. Click here to see if a membership is something for you!

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Now it’s your turn

What do you think? What do you think? Do you recognize the explanation about the project budget? Do you ever work with a project budget? Which tools do you use for this? How important do you think a budget is in project management? What other things would you like to know about the project budget? Can you use the template in your work environment?

Share your experience and knowledge in the comments box below.

More information

  1. Musarat, M. A., Alaloul, W. S., & Liew, M. S. (2021). Impact of inflation rate on construction projects budget: A review. Ain Shams Engineering Journal, 12(1), 407-414.
  2. Ballard, G. (2012). Should Project budgets be based on worth or cost. In 20th Annual Conference of the International Group for Lean Construction, San Diego (pp. 761-770).
  3. Khosrowshahi, F. (1988). Construction project budgeting and forecasting. AACE International Transactions, C-3.

How to cite this article:
Janse, B. (2022). Project Budget. Retrieved [insert date] from Toolshero:

Published on: 12/19/2022 | Last update: 03/12/2024

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Ben Janse
Article by:

Ben Janse

Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.


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