6 tips for managing your project budget

Budget overruns have always been a litmus test for project success or failure. In 2020, the COVID-19 pandemic made staying within budget became a bigger nightmare, with the most successful companies, and the best project managers, put to the ultimate test of prudently managing financial resources during massive uncertainty.

Many stakeholders have had to reexamine their changing priorities, budgets, and project success or failure definition. The global uncertainty now fuels the increasing pressure for project leaders and their teams to change their budgeting strategy and project execution. As such, effective budget management is a primary area of focus for project managers who value their careers.

Following are six strategies for maintaining control of your project budget during a time of increased uncertainty before it succumbs to whopping cost overruns.

Understand stakeholder’s true needs and wants

What stakeholders say they need or want in a project often isn’t as simple as it may seem upfront. This can lead to unidentified goals and expectations on both sides of the table. Suppose a project manager, sponsors, team members, and vendors don’t have a solid grasp of stakeholders’ true desires. In that case, it’s almost impossible to identify what the requirements are for the project. Be sure to put in as much time as is required to get a deeper understanding of what stakeholders expect. Ultimately everything, including the budget, is defined by stakeholder expectations, deliverables, and other requirements. So the first step to an effectively managed project budget is to ensure project requirements are accurately identified, documented, and confirmed with all stakeholders — and that these are communicated to all parties involved. This crucial step should be completed before budgets are set. Many projects have been initiated around needs but executed around wants, automatically putting projects at risk of budget overruns that leave everyone disappointed.

Recognize when circumstances have changed

When it comes time to estimate costs, be realistic — leave room for unforeseen changes. When circumstances change, make sure to get input from all applicable stakeholders. More importantly, build in contingencies. This step is essential as most companies discovered during the pandemic. Many factors outside of your control can impact your budget, including the pricing of supplies, resources, labor, financing, product/service shortages, currency exchanges, and so on. Today’s price for many essential products or services is much higher than at the start of most projects prior to COVID-19. Make sure vendors can deliver on their promises and prepare a backup plan. Getting input from other stakeholders and vetting suppliers and vendors can go a long way to setting a more realistic budget that can be met, even when there are unforeseen circumstances that impact costs. I’ve seen many project managers get caught off guard with escalating costs, suppliers that couldn’t meet quoted obligations, or other issues. Plan for surprises, so you aren’t blindsided.

Keep stakeholders informed

Once you become aware of changes that might impact your projects and stakeholders, it’s critical to loop them in and let them know what’s changed, how it affects them and the project outcome, and what’s being done to keep as close to budget as possible. If maintaining the current project budget is not possible, stakeholders should know the root cause of any potential overruns to make informed decisions about proceeding. Scope changes are likely necessary. The important point here is that uncertainty in the broader sense, such as a pandemic, is unavoidable, leaving other budget-related decisions that need to be made in a timely manner. Stakeholders such as the customer may need to decide whether the time or circumstances are right to continue, defer, or stop a project altogether.

Precisely identify and manage change

Change management is one of the most underestimated areas when managing projects. Project management specialists understand the importance of communication and how processes impact stakeholders. Something may seem like a slight change in any process yet can significantly increase costs and throw off budgets. Change management specialists should work with project teams to identify, document, and communicate the precise strategies to deal with internal and external changes that can push costs over budget.

Develop relevant KPIs

You can’t effectively manage a project budget without establishing key performance indicators (KPIs). KPIs help you ascertain how much has been spent on a project, the extent to which the project’s actual budget differs from what was planned, and so on. Here are just a few commonly known and used project KPIs that are essential to effective project budget management:

• Actual cost (AC), also known as actual cost of work performed (ACWP), shows how much money has been spent on a project to date.
• Cost variance (CV) indicates whether the estimated project cost is above or below the set baseline.
• Earned value (EV), aka budgeted cost of work performed (BCWP), shows the approved budget for performed project activities up to a particular time.
• Planned value (PV), aka budgeted cost of work scheduled (BCWS), is the estimated cost for project activities planned/scheduled as of the reporting date.
• Return on investment (ROI) shows a project’s profitability and whether the benefits have exceeded the costs.

Update KPIs as circumstances change to ensure the right information is being captured and measured for decision making.

Revisit, review, re-forecast

A project left to run without budget management and re-forecasting will lead to failure. Frequent budget oversight is essential in preventing budgets from getting too far out of hand. A 10% budget overrun is far easier to correct than a 50% overrun, and if you don’t keep an eye on your budget and reforecast, that 10% overrun can turn into a 50% overrun before you know it. Your chances of keeping a project on track with frequent budget review are far greater than if you forecast once and forget about it.

Just as a project’s budget needs to be constantly revisited to keep it on track, so too do the project’s resource usage, since the people working on a project contribute to its cost. Project managers should review the number of people currently working on a project and the project’s future resource needs on a weekly basis. Doing so will ensure that you’re fully utilizing the resources you have and that you have the right resources ready for the rest of the project. Regularly revisiting the resource forecast and current needs will help keep your project budget on track. Scope creep is one of the leading causes of project overruns. COVID-19 ensured a significant amount of unplanned work made its way into many projects globally — creating an increase in billable hours and out of control project budgets. Project managers must carefully manage scope by creating change orders for work that isn’t covered by the project’s initial requirements. Change orders authorize additional funding for the project to cover the cost of extra work and thus keep the project aligned with its new budget.

More on project management:

• Project management guide: Tips, strategies, best practices
• What is a project manager? The lead role for project success
• Top 20 project management methodologies
• 5 early warning signs of project failure
• Top 15 project management certifications