What is a Project Budget? Understanding Project Budget and Its Essential Requirements

When planning a capital project, it’s tempting to focus on the cool stuff like end-of-trip facilities with showers, stations, lockers, Dyson blow dryers, bike racks… oh, and free towels. But before diving into these amenities, it's crucial to have a well-developed project budget and manage it through the right stages!  

For project managers, the budget and the budget release through stages are immovable objects that require effort to progress and get the next stage of the budget approved. Project managers aim to deliver maximum scope and quality in each phase within the allocated budget, proving that this project should move forward and deliver the promised returns.

In this article, we will discuss the importance of a project budget and equip you with the knowledge and strategies to create a comprehensive budget breakdown and leverage it as a powerful tool for good governance, saving time and cost, and increasing quality.

What is a Project Budget?

A project budget is a financial plan that covers all project phases from planning to completion. Unlike a construction budget, a project budget covers all facets of a project – not just the construction phase.

This critical amount of money and how it is released serves multiple roles throughout the lifecycle of a project, fluctuating before being locked in. A project budget encompasses all anticipated costs and allocates funds to specific phases. These will be unique to your organization but, for example's sake, will include Planning, Design, Construction, and Contingency/Risk.

Overall, the project budget should cater to the ultimate aim of delivering an asset and meeting its end users' functional requests (within reason 😋). It should also anticipate all potential capital or infrastructure project risks.  

By dividing the budget into these key elements, project owners and their project managers can ensure a logical and financially sound stewardship of the project through the stages and allow key hold points for project owners to decide on progress to the next stage.

Key Elements of a Project Budget

Planning Budget

The planning budget covers initial project expenses, including feasibility studies, environmental impact assessments, and preliminary site investigations. This phase involves early-stage activities like investigating permits, investigating the site, consulting with designers on some early ideas, and super ballpark estimates.

• Feasibility & Site Investigation Studies: These studies assess the viability of the project's various locations and provide a basis for informed decision-making on whether to proceed to design.

• Permits and Approvals: Investigating necessary permits and approvals to move the project beyond design. You don’t want to do all this work and then let an authority block you.

• Consultations: Engaging with stakeholders, including community consultations and initial design discussions.

This planning stage is generally a tiny amount of money, enough to cover the above, before deciding whether to commit further funding to design. It is much easier for project owners to get a small amount of funding for these early activities than to seek approval for an entire construction budget.

Design Budget

The design budget provides funding related to developing detailed project plans and specifications. This phase ensures the end capability or end user’s functional requirements are developed to a reasonable level of design (e.g., 30% Concept Design).  

• Architectural and Engineering Fees: Payment for services from architects and engineers who create the project's blueprints.  

• Detailed Designs and Specifications: Develop comprehensive plans that outline materials, dimensions, and construction methods.

• Pre-construction Services: Early contractor involvement, value engineering, and cost estimation to refine the project's scope and budget.

There are four major design stages, so it depends on the project and expert advice on how far you take it before going to construction. They are generally 5% design, 30% concept design, 50% schematic design, and Tender/IFC (issue for construction) stages.  

Construction Budget

The construction budget is the bulk of the project's financial plan, covering all expenses related to the actual construction process. This is the final commitment of money to complete the project, including direct and indirect costs and provisions for materials, labor, and equipment.

• Materials: All construction materials cost, from basic supplies like cement and steel to finishing products like paint and fixtures.

• Labor: Wages for workers and subcontractors, influenced by the project's duration, complexity, and labor agreements.

• Equipment: Expenses for machinery and tools, including leasing, maintenance, and operation costs.

• Overheads: Indirect costs include site security, temporary facilities, utilities, and administrative expenses.

Read more about the construction budget specifically in our blog ‘What is a Construction Budget?’

Contingency/Risk Budget

The contingency/risk budget can sometimes be rolled into construction but is generally reported separately. This bucket provides a financial cushion for unforeseen circumstances impacting the project. This budget allows for better risk management and flexibility.

• Contingency Funds: Typically, 5-10% of the total budget, reserved for unexpected costs like delays or price fluctuations.

• Risk Management: Allocating funds to address identified risks, ensuring the project can adapt to changes without compromising financial stability.

We see many clients moving away from contingencies and using risk-based build-ups to create a detailed picture of known and unknown risks on the project. Risks are realized or retired over time, providing much greater control of how much money must be held to cover remaining risks or what can be released to build more scope.

Importance of Budget Planning for Client-Side Project Managers

Client-side project managers are crucial in managing the project budget and progression to the next stage. Effective budget planning is essential for several reasons:

• Risk Management: Comprehensive budget planning enables project managers to identify and mitigate financial risks early in the project lifecycle.

• Stakeholder Confidence: Transparent and accurate budgeting builds trust among stakeholders, leading to sustained investment and support.

• Project Performance: Regularly monitoring and revising the budget allows for real-time financial management and adaptability to changes.

• Showing Value: Delivering maximum scope and quality within the project budget enhances the project's value and reputation.

• Stage Release: Funding approval is structured into logical sequence hold points, providing confidence to the sponsor that funds are being used efficiently and effectively.

• Tranche Funding: Releasing money in tranches to progress work makes getting approval for each phase easier, ensuring a controlled and systematic approach to project financing.

Conclusion

Understanding and establishing a clear project budget and releasing funding in stages provides a logical sequence of hold points and gives confidence to the sponsor along the way. These budget stages also allow project managers to make informed decisions about adding value, mitigating risk, and negotiating with contractors and suppliers.  

At Mastt, we recommend implementing this staged budget approach to your financial reporting, as proper budget reporting facilitates financial discussions with stakeholders and helps deliver projects successfully under budget.

Ensuring control over your project budget in this manner is the key to avoiding cost overruns and delays – or the worst-case scenario of building a failed project that should have stopped at the planning stage.

Remember, as a client-side project manager, it is your responsibility to keep the budget on track, ensuring the project's success and financial health.

Want to know how Mastt can help you make better decisions with real-team budgeting and forecasting? Learn more here.