One of the biggest challenges in planning and executing a project is compiling the budget. Regardless of the industry and the scale of the project, a detailed forecast of the potential costs is crucial for successful project delivery.

At first glance, budget planning appears to only include labor and material costs. But, on the contrary, many costs besides these need to be considered when it comes to planning a project budget in order to avoid project failure. Basically, laying out a budget means you have worked through all the details of the entire project. So the better projection of the cost estimates, the bigger the chance of completing the project successfully on budget and on time.

If you are a project manager working on a particular project, in the first phase of the project management, which is the initiation phase, you have to make the budget plan. When creating a budget plan, firstly you need to determine the different types of costs that need to be taken into consideration. Secondly, you have to prepare yourself for a possible change of the budget, and in the end to manage and monitor budget while your project is in progress.

1. Calculating anticipated costs

The first step in creating an accurate project budget is the calculation of the anticipated costs. Nowadays, many projects fail to reach the estimated budget because potential costs are not precisely estimated. Therefore, for a plan to be complete, specific amounts of the total budget need to be assigned to different categories of costs. These categories can be directly or indirectly attributable to the project.

Direct project costs are the costs that influence and benefit the project directly and usually can be calculated with generally high accuracy.

Labor costs

Labor costs include the spendings required for the people working on the project. These include team members’ salaries, bonuses, benefits, etc., that need to be paid according to a contract, i.e. on a daily, weekly or monthly basis. Labor costs may vary depending on the level of experience and expertise of project participants, as well as the number of their working hours and days.

Project equipment and materials costs

Materials costs refer to the expenses for all materials used for production or manufacturing of commodities, while equipment costs usually relate to specific items and tools required for execution of the project.

Project management software costs

Software costs include all the expenses needed for providing the team members with the necessary software licenses for project management. While there are many useful project management software which can facilitate the process of managing a project, some organization make wise decisions by optimizing the costs for the needed tools.

Travel costs

Travel costs comprise the costs assigned to traveling for performing project work or arranging client meetings. Traveling cost can diverge because of the number of people that need to execute work on different locations, as well as the time they will spend on business trips.

Indirect project costs are the expenses that help the company to operate. These costs are not directly tied to a specific project and, therefore, can be assigned to more than one project.

Administrative costs

General and administrative costs may include the potential expenses for different administrative procedures. All spendings relating to rent, taxes, utilities and office supplies may be considered as administrative or general expenses. To these costs can also be added to consulting and legal fees.

Office supplies and equipment costs

In comparison with project equipment, office equipment includes all the items and tools that are required for ensuring optimal working conditions and effective performance of all employees.

2. Preparing for a budget change

The initial calculations of the budget are usually an approximation of the potential costs that could have a great impact on the project as a whole. Initial means that these costs, no matter if they are direct or indirect, might change along the way. Therefore at the beginning of the budget planning, it is important to prepare for unexpected alterations of the costs. Unexpected changes in costs may occur due to various reasons. If the project manager doesn’t plan these costs, they could risk keeping the project on track.
In order to prepare for unforeseen changes in the project budget, the project manager should determine potential problems that might jeopardize the final project’s outcome.

3. Managing and monitoring budget

Many companies tend to define the target budget and different costs categories very early before the project starts. Later, depending on various factors, they allocate the budget to individual costs categories. Managing and monitoring separately all costs and the project budget as a whole can be a great challenge. But this phase is crucial as it ensures that you have a complete control over your project’s spendings.
However, the work is not done when a specific target budget is defined. All costs need to be managed and monitored regularly while the project is in progress in order to make sure they are in line with the initially planned budget. In the end, if any kinds of issues are noticed, the most important thing is to act accordingly.


Whatever the scale of the project you are working on, direct and indirect expenditures need to be taken care off, because a good estimation of the budget could be a project savior. This means that only after you compile a detailed budget plan you can start with the project execution.

It is always better to go under than over the set budget. However the more accurate the budget, the bigger the possibility to avoid unwanted alterations. The approach to planning a budget may differentiate according to the industry, project scale, number of people working on it, and much more. But whichever approach is chosen, the most fundamental aspect is to compose the budget carefully and to monitor it on a daily basis.

Vivien Gold
About the author:
Vivien Gold strong is a consultant, project controls, and planning manager, with expertise in implementation and consultancy related to Oracle Primavera P6. She’s been part of the project management industry for more than 20 years and regularly writes on her blog.

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