Community Champion
Guessing is not a strategy: How to build decision velocity with AI and real-time data
June 10, 2026 | Live Webinar
Categories: budget
So you’ve been given a project with a budget? Or you’ve been asked to create a project budget for the first time? Here’s what you should know.
The expected total
Even if you’ve been told to create a budget from scratch, the person who asked (your project sponsor) already has an idea in mind for what the “right” number is. Save yourself some time and ask them to tell you what their expectations are for the final figure.
Now you have to work out how close you can get to that number.
Breaking down the cost elements
You need to work out how much each individual element of the project is going to cost. This is called bottom up estimating.
Take your list of items and estimate a cost for each one. Involve any subject matter experts in this and make sure that you take into account any constraints and assumptions. The aim is to get a detailed and accurate (albeit estimated) take on how much each element costs.
Add the individual estimates together, and that’s your total expected spend. Hopefully, this matches the initial expectations of your manager or project sponsor.
Review against expectations
Once you’ve done some work on the budget, you’ll have an idea of whether you can hit the target they have in mind. If it looks like you’ll need more than that, you can start to position the scope of the project in a way that helps you get closer to the number. Here are some suggestions:
- Take scope items out
- Propose a Phase 2 so that extra funding can be secured later for additional features
- Reduce the resource requirements so you use cheaper resources, and accept that this might mean the project takes longer.
Or, of course, you could build a robust defence for why your project is going to cost more than your sponsor originally expected! Use data and facts to create the justification.
Next, you should talk to your sponsor about the other budget areas that should be considered before the budget is considered final.
Add management reserves and contingency
You can find out more about management reserves and contingency in this article, including how they fit into your overall budget.
Talk to your project sponsor about making sure there is adequate contingency for the project, and management reserves as required.
Add a risk management fund
If your project is relatively large and likely to be affected by significant risk, then it’s worth building in a risk management fund (more details on that here).
Basically, a risk management fund helps you pay for the activities required to mitigate, transfer or otherwise deal with risks. Instead of just tracking the risks, you can actually do something useful with your pot of money to offset the impact they might have on the project.
Set tolerances
Finally, talk to your sponsor about budget tolerances. That basically means the boundaries within which you can act without going to them for further approval. On a budget of £1m, you don’t want to be asking them for sign off because you need to spend an extra £10. Set some limits with which you are both comfortable and that give you freedom of action but ensure some rigour.
Note: tolerances in this instance specifically relate to financial boundaries, but the concept of tolerance is useful for other areas of project management too, like setting boundaries for schedule and risk. Tolerances provide you with guidance around how you can act without escalating.
Finally…
With all the calculations and discussions out of the way, you should be at a point now to agree the final budget. This figure is what you will work to and track against during the life cycle of the project. It’s the figure approved for your project, and you’re responsible for using the money wisely.
Report spending to the project board or steering committee and make sure you keep your numbers up to date. If you need help with tracking spend in a way that is considered appropriate by your company, start with the PMO. They probably have software or spreadsheets you can use to store all the financial figures. If you’re lucky, it might automatically create the information required for your financial reporting too!
Want more tips on creating a budget? Read this next: 5 Ways to Create a Budget
Pin for later reading:
Posted on: March 26, 2019 08:00 AM |
Permalink