Why Should I Use Budget Tracking in Project Management Software?
A project budget outlines the expected income, expenses, and profit for your project. Project budget tracking enables you to monitor how much of your budget has been spent over time, to see how much is remaining and course-correct when necessary.
For example, imagine one of your project tasks took much longer than budgeted. If you didn’t realize this until the end, it could result in the project being over budget. But, if you’re tracking your costs and notice this when it occurs, you can try to offset those extra costs somewhere else in the project.
How to make a project budget
The income side of your budget is typically straightforward. There tend to be three primary types of project income:
- Zero income: If you’re running an internal project for your company, there is likely no income to track.
- Fixed income: In this scenario, the project has a set price. It may be paid in installments over the life of the project or in one lump sum.
- Cost-plus: These projects typically pay you for your costs plus a fixed markup for profit. This is most common for new or unusual projects where it’s difficult to estimate costs accurately. However, you will likely still have targets you’re expected to hit.
In a cost-plus scenario, your budget is more fluid, but it’s even more important to accurately track and report costs as the client will expect to see hours and dollars spent. If a task has what seems like a high cost, they may require more detail or even dispute the charge.
Therefore, even in cost-plus or zero income scenarios where you’re not worried about profit margin, it’s still important to create and track your project budget.
Types of project costs
Costs typically fall into two broad categories: fixed and variable costs.
Fixed costs are set for the project and will not change. For example, if you have a guaranteed quote for material, it’s a fixed cost.
Variable costs, on the other hand, change based on activity. Labor hours and subcontractor hours are two examples of variable costs. If they need to spend more time on the project than expected, the cost will go up.
It’s important to put all expected costs in your budget tracking tool and note which ones are variable, as these costs need the most monitoring.
You’ll need to see your costs as a meaningful level of detail. For most projects, this is at the task level. However, in some situations, you may prefer monitoring costs at a higher level, such as by employee group.
You will also want to lay out your budget over time to help track your progress. For instance, you may know your project takes 100 hours of design work. But if that’s 100 hours over three months, you may want to break it down into a monthly or even weekly budget. This way, it’s easier to spot variances early on.
Managing a project budget
Managing the project budget is one of the most difficult parts of project management, yet it’s a huge factor in determining its success.
The goal is to keep your budget in line throughout the course of the project so you can avoid falling into emergency mode at any point. This could include incurring a huge budget overrun that you have to fix or you may find yourself at the brink of project shutdown.
The following three processes are extremely helpful in keeping project budgets in check:
- Review the project budget at least weekly: It’s crucial to stay on top of the budget. It's much easier to fix a 10% budget overrun now than a 40% budget overrun a month from now.
- Make your project budget high-profile: Make sure your team members know you're closely tracking the project budget in detail. This will reduce the likelihood of non-project hours being incorrectly charged to your project.
- Manage project scope closely: It’s very easy for the customer to make a small request that unintentionally results in hundreds or thousands of extra dollars being added to your project. Remind your team that any “extras” need to be properly assessed for impact before they’re added to the project.
Why project management software with budget tracking is important
Your project cost is a key performance indicator (KPI). If you’re not actively tracking your budget, you may miss signs that your project is going off track until it’s too late.
Project management software with budget tracking allows you to automatically and continuously monitor your budget throughout the project so you’re aware of any budget variances in time to properly manage their impact.
Unfortunately, in many industries (such as construction), going over budget is the number one issue for most related jobs. Of course, poor budget tracking is not the only reason for cost overruns. Other issues may be:
- Missed project scope or scope creep
- Poor or inaccurate estimates
- Using the wrong resources
But budget tracking helps you identify problems as they begin to crop up. For instance, imagine you have a budget of 20 hours for a designer to complete an ad. But when you check on progress, you see that 10 hours have been spent, yet the ad is not half done. Maybe after investigating the cause, you discover that this designer is new so it’s taking much longer than it would for an experienced designer.
Now you have time to decide whether you replace the designer with someone more senior to try to recoup time, allow the overage and make it up somewhere else on the project, or find another way to stay within your total budget.
Let’s look at another example. Imagine that a task was budgeted at 15 hours, and your tracking shows it’s now at 15 hours, but not marked as complete. You check with your team and they tell you that the task is done, but the client has asked for additional work before it’s accepted. You can now tell your team to mark the task as complete and let the client know that what they’re asking for is additional scope, which means it needs to be created as a separate task with its own timeline and cost.
Not only does this help you avoid overspend, but it also avoids scope creep and keeps you on schedule.
If you couldn’t track spending in real-time, you wouldn’t have caught either of these scenarios early enough to properly manage them. That’s why it’s important to have your budget tracking somewhere visible — such as within your project dashboard — so you can easily stay on top of it at all times.
The right project management software is one of the best ways to prevent out-of-control spending and overrun costs. With budget tracking, you’ll always know exactly where your work stands and how much money and time has been spent, and you’ll be able to more accurately predict the cost and timeline for the entire project.