How to Develop a Project Budget: A Complete Guide 2024

Everybody knows that every proposal needs a budget. The project budget describes the monetary aspects of the project and explains exactly, which areas of how much money should be spent. A project budget simply refers to a document that specifies how the money will be allocated to implement the activities described in the proposal. The budget gives a clear picture of all expenditures involved in carrying out a project. The project description provides the picture of your proposal in words, whereas the budget further refines that picture, but with numbers. In short, a budget is a description of the project in numbers.

While there are many ways to organize a budget, most are comprised of two main sections: income and expenses.

Income includes all sources of project funding – grants, donations, the value of in-kind gifts, the value of volunteer hours, earned income, matching funds, etc.

Expenses or expenditures enumerate how and where that money will be spent. Expenditures may be itemized, and summarized by category, activity, etc.

It is also important to note that project budgets are just one of the many types of budgets NGOs may need to maintain. Others include operating, program, and projection budgets.

But how can you actually develop a project budget?

This can be an intimidating task. In this article, we give you some pointers on how to go developing a budget to be successful in your fundraising.

When should you develop the budget?

Many people leave the development of a budget as one of the last tasks. This is a mistake though. Developing a good budget takes time and should not be left for the last minute. Doing it first is also not a good idea though. While you write the entire proposal, your project probably changes and evolves during the process. When you have written your budget as one of the first steps, the danger is that these changes accidentally do not get reflected in the budget.

Ideally, the budget should evolve with the project. This way, you have enough time to spot potential problem points and fix them. At the same time, it makes sure that your budget really represents your proposal, and that nothing gets left out. If you – for some reason – cannot do this, at least make sure that your proofreaders in the end also check the budget for correctness. They should also check if every task described in the project is reflected in the budget in an appropriate manner.

Other Uses for Budgets

A budget can tell a donor a lot more about the project and NGO than just the price of goods. Donors look to the budget to see:

• Transparency – are you willing to share staff salaries, overhead costs, and other sources of income?
• Value for money – what is the value of your impact compared to your project cost?
• Capacity – does your financial history show you are able to efficiently manage a program?
• Competitiveness – how do your costs compare to other applicants?
• Following guidelines – did you read and abide by the donor’s instructions?

The project budget – by activity or line item?

When you develop a project budget, you need to decide how to organize it. In a project budget, it is very important that it is easy to understand at first glance. When a donor sees it, they should not be confused by it but instead, instantly be able to grasp the additional information that is held in it. There are two main ways to organize a budget: by activity or by line item.

Budget by Activity

Organizing a budget by activity basically means having a list of your proposed activities and splitting it up into smaller items. Each activity has different budgetary items assigned to it. Groups of activities are combined under one objective.

This way of organizing a budget has the advantage that it is very easy to understand and also to write. You basically follow the structure of your proposal and really add a description of a number of your different activities. This way, it is easy not to forget anything as you can go mentally through every activity. This kind of budget gives additional information, that can make it even easier to exactly understand your intentions.

Budget by line item

Organizing your budget by line item means lumping together similar kinds of costs in one budget item. This could be transportation, training, materials, etc. Some donors request this specifically. It gives a good impression of which kinds of activities your project wants to spend money at a glimpse. This can be important if a donor has different budgets for different kinds of costs.

From a viewpoint of practicality, this kind of budget is much more difficult to prepare though. Some costs might not explicitly belong to one category. If you try to write a budget by line item from the get-go, you will also probably forget something. It is much more difficult to follow through logically, as you do not follow the structure of your proposal.

If you have to prepare a budget by line item, do it by activity first. When this is done, you can develop the line item structure from there. This way, you are less likely to forget anything. Many donors also request both formats, so the work you put into your activity-based budget is not lost!

If you have a choice, always do a budget by activity. As stated above, it is much more logical and will come easier. But keep in mind, if the donor gives you a template or guidelines, you have to follow these no matter what.

Click here to download a sample proposal for free!

Who should write the budget?

When you work for a small NGO, you probably are developing the budget for the project proposal you are writing yourself. If you work in a bigger NGO, maybe an accountant is doing it for you. Both versions have their pros and cons that you should consider.

If you are a project agent or a fundraiser for your organization, you do not necessarily have the required skill in financial topics that you need to prepare a good budget. Of course, you can deal with simple things, but what about calculating an overhead ratio, contingency cost, etc. For this, you might need the assistance of a professional in the field.

At the same time, while the accountant might understand all these nuances, they do not know everything about the project. They might leave important budget items out because they do not know how the activities will actually be implemented.

Ideally, you should try to make a space where you can develop a budget together. Learning from each other and combining the input from the project management side and the financial management side produces the best results.

In the end, you will need a good proofreader to check if your budget is streamlined with the rest of the proposal though. While it is a good thing to have input from more than one person on the budget, this can also lead to inconsistencies that should be avoided.

What kind of cost can you include in your budget?

The kind of costs that you can include in your budget depends on the donor. The budget for your project may be as simple as a one-page statement of projected expenses or it may require a more complex presentation, perhaps including a separate page on projected support and revenue with notes explaining various items. when you prepare to assemble the budget, go back through the proposal narrative and make a list of all items related to the operation of the project. Make sure to differentiate between project budget and organizational budget. The main difference between your project budget and the organizational budget is the scope. They may look pretty much the same (probably both in an Excel file). Nevertheless, one explains how money on one specific project will be spent, and the other how the money of the entire organization will be spent. Thus, the project budget is only one part of the organizational budget. If your NGO is implementing various projects at the same time, your organizational budget will be comprised of all of these budgets. Typically, it also covers reoccurring costs like rent, insurance, salaries, and the like. If not directly related to the implementation of a project, you typically cannot include these types of costs in a project budget.

In the guidelines for grant applications, you can find information about what you are allowed to include and what not. Sometimes donors allow you to include salaries and rent, sometimes they don’t. Sometimes they allow you to include contingency, sometimes they don’t. Sometimes a donor wants to see your organizational budget to see if your organization has a specific size. i.e. some donors only want to work with organizations that have a budget that is double the amount of the grant applied for. In these cases, you have to submit your overall budget – or at least an overview. In many cases donors also require co-payments. Be very careful to understand what is allowed and what is not before you apply.

What is the overhead cost?

Overhead cost refers to the cost that occurs to run an organization and that is not directly related to the project implementation. the overhead cost allows the project to bear a portion of the administrative costs, often called supporting services, of your operation. These could be items like salaries, rent, insurance, etc. These costs might not be directly attributable to the project but can be allocated to the basis of the notion that the project should bear some of the costs of the organizational operation. It is important to distinguish between salaries for project staff and salaries for supporting staff like secretaries, accountants, etc. The former normally is not counted towards the overhead cost, the latter is.

Sometimes only half of a salary counts as an overhead if the person only works half of the time for the organization in general and the other half in the project. Not all donors allow to include the overhead cost in the budget, and some only allow a certain percentage. Even if donors allow it, you should try to keep it at a reasonable rate though. Many times, an overhead ratio of around 15% is recommended.

What are co-payments?

Co-payments are payments that the donor requests from the NGO side. They can be from the applicant organization directly from the beneficiaries. The donors do this to make sure the applicant is completely invested in the project and also does it’s part. Furthermore, it is a way to make the money last longer. sometimes if grant support has already been awarded to the project, or if you expect project activities to generate income, support and revenue statement should be included in the budget. If a co-payment by the beneficiaries is requested, this is a very good way of making sure they really want to participate in the project. If they are willing to pay – however little – for the service you offer, they will also do their best to use it and make it work.

A co-payment does not always have to be monetary. If you work with very poor beneficiaries, it makes sense to consider in-kind contributions as well. This could be materials to build, manpower or food. To include this in the budget, just attach the actual value of the products to the item and explain – either in a side note or in the budget narrative – that these are in-kind contributions.

What is a contingency cost?

Contingency costs refer to the cost that you expect will occur, but about which you are not 100% sure. These could be rising prices for materials, changes in the exchange rate of your currency, etc. Some donors advise you to include a blanket rate of a specific percentage in your budget, but others do not allow it at all. When including contingency, it is important to have a good reason for it. Do not just include it to have an extra buffer, but have a good justification in place. If the exchange rate of your currency was highly volatile in the last few years, you should probably plan for that. If the prices for materials have been skyrocketing in the last months, they will probably continue to do so. Make sure that the donor understands your reasoning and does not think you just included contingency costs to inflate the budget.

Budget Narrative

Sometimes the donors request an addition to the plain budget made out of numbers, something called the budget narrative. Even if the donor does not specifically request it, it can make sense to include it anyways. It is always necessary when the plain budget might not be clear enough.

A budget narrative is an accompanying text to explain and justify the numbers in the budget. It is used to explain any unusual line items in the budget that is not clear. Sometimes it is not clear how specific items in the budget would actually help further the project, and the budget narrative is the section of the proposal where you can explain these. Also, the amounts in the budget might need further explication.

In which cases should you include a budget narrative?

Budget narratives are normally included in a project proposal when the donor specifically requires them in their guidelines. You can also include it when you deem them necessary. Always ask yourself if all the items in your budget are self-explanatory or if a text would be necessary for additional information. You should include a budget narrative when a specific item is more expensive than usual or does not directly and obviously relate to the project.

One example where I included a budget narrative is a project where materials had to be transported on a river. One way was downriver, one was upriver. Only looking at the numbers, the prices for the one way were triple the price for the other, and without an explanation, it would have looked like I made a calculation mistake. Other cases could be when you need additional staff or materials that are particularly expensive due to pressure, season, or other reasons that are not obvious to an outsider.

Where should the budget narrative go in the proposal?

There are different ways to include a budget narrative in a project proposal. You can just add some commentary to your budget if bullet points are enough to explain the numbers. Another way is to write a narrative text that is added underneath the budget. Whichever format you use, make sure that you use plain and simple language. The budget narrative should clearly explain everything and not leave any doubts for the people reading your project proposal.

10 Quick Tips for Writing a Great Budget

We can not less emphasis on how the budget is one of the most important parts of the proposal. If you do great on your budget, the donor will immediately see that you know what you are talking about and are an expert in your field. But many people dread budgets and try to avoid them whenever possible. While words leave a lot of open space, numbers can be intimidating and much more precise.

Here are 10 quick tips on how you can write great budgets and overcome your fear.

Don’t leave it for last

Many grant writers dread budgets and leave them for last. If you do that, you run the risk of having to rush them and not doing your best work on them. Do not make this mistake. The budget should evolve with your proposal and you should constantly work on it while you develop your project. If you work on it simultaneously, you will not have this scary and huge task in the end.

Make sure you have all the correct numbers

To write a correct and sound budget, you need to know what the prices of things are. Make sure you can find out these numbers and have the resources to do so. Sometimes it can be as easy as online research, sometimes it takes more time if you have to consult people from your beneficiary group. Make sure you have the right numbers in time though.

Chose one format and stick with it

It is very important that your budget follows a format that is easy to understand and gives a good overview. Make sure that it is not only correct but also looks nice. You can organize your budget by activity or by line item.

Check the math – not only once

It is of crucial importance that you check the math of your budget – not only once. If you make a simple addition mistake somewhere, your entire budget can be off and this can make a very bad impression. Make sure your numbers add up and are in the right spot. Have someone go over it with you, so you can be 100% sure of its accuracy.

Calculate realistically

When writing your budget, you should always work with real numbers. Do not underprice or overprice, because both things can become a problem for you. If you state prices that are too low, you will have problems implementing your project later. If they are too high, the donor might notice and not give you the grant. Be realistic in your budget.

Make sure you include everything

There are many different types of costs that you can and should include in your budget. Make sure you take into account all of them. Did you include transportation, food for workshops, stationaries, and salaries for trainers? All these things cost money and should be part of the budget. If you have to show a copayment, you can also include the contributions of your beneficiaries, even if they are in kind or in the form of work.

Make budget writing a group activity

Do not write the budget all by yourself. While one person should have the lead on the project, you should seek the input of various people in your organization. You might forget something or lack detailed knowledge in some areas. Take advantage of the combined knowledge in your organization.

Think about inflation and exchange rates

When writing a budget for a project proposal you should keep changing prices in mind. If you live in a country with a high inflation rate or work in a field where prices for goodwill likely rise, include a margin for that in your proposal. The same goes for exchange rates if you have to write the proposal in a different currency, make sure that you include a margin for potential changes in the exchange rate.

Explain extraordinary costs

Make sure your budget is self-explanatory. If something needs further explanations, make sure they are right there and easy to find. Costs that are extraordinarily high need extra attention to make sure your donor does not think you are trying to take advantage of them.

Have someone proofread your budget in the context of your proposal

Like the project proposal, your budget also needs proofreading. We have already talked about how important it is to have the numbers right. It is also important that your budget fits into your proposal. Sometimes you write the budget first and forget to add an activity later. Make sure that someone looks at the entire proposal as an entity before you submit it.

Do you have any more questions about developing a project budget? Just let us know in the comment below!