How to set a project budget for client work
Estimating from tasks, choosing between hours and money, fixed fee or time and materials, contingency, and the alerts that catch overruns early.
By the LockedHours team · · 3 min read
A project budget is a promise to two people: the client, who wants to know what they'll pay, and you, who wants to know whether the project will make money. Most overruns aren't caused by a bad estimate; they're caused by finding out too late. This guide covers both halves: setting the budget and watching it.
Start from tasks, not from a total
Break the work into the tasks or phases you'll actually track time against: discovery, design, build, review, launch. Estimate each one in hours, ideally by asking the people who'll do it. Totals estimated top-down tend to match what the client hopes to spend, not what the work takes.
Then look back. If you track time by task, your last five similar projects tell you how long "design" really took compared with what you estimated. That ratio is the most useful number in estimating.
Budget in hours or in money?
| Budget type | Best for | Watch out for |
|---|---|---|
| Total hours | Teams that sell time; simple to explain to staff | Ignores who did the work; senior hours cost more |
| Total fees (billable amount) | Projects with mixed rates; matches what the client sees | Can hide overruns if cheaper people do more of the work |
| Total cost | Fixed-fee work where margin is what matters | Needs cost rates per person |
| Monthly hours or fees | Retainers and ongoing support | Needs a rule for unused or extra hours |
Many firms keep an hours budget for the team, because people think in hours, and check fees or cost in reports, because the business thinks in money.
Fixed fee or time and materials
With time and materials, the client pays for the hours worked and the budget is an estimate or a cap. With a fixed fee, the client pays an agreed amount and the budget protects your margin. You need a budget in both cases; with a fixed fee, it matters more, because every hour over is paid for by you.
A practical middle ground is a fixed fee per phase: estimate, agree and bill each phase on its own, and re-estimate the next one with what you've learned.
Add contingency on purpose
Add a contingency line, typically somewhere between 10% and 20% depending on how well understood the work is, and show it explicitly rather than padding every task. A visible contingency is easier to defend to a client and easier to track: when it's used up, you know it's time to talk about scope.
Monitor the budget weekly
- Set an alert threshold. 80% is a common choice: late enough to be meaningful, early enough to act. Whoever runs the project should get the alert, not just finance.
- Compare progress, not just spend. 60% of the budget used is fine if 70% of the work is done, and a problem if it's 40%.
- Look at hours by task and by person. Overruns concentrate in one phase or one person far more often than they spread evenly.
- Raise scope changes when they happen. A change request agreed in week three is a conversation; discovered at invoicing, it's a dispute.
Project budgets in LockedHours
In LockedHours a project's budget can be total hours, total fees or cost, for the whole project or per month. The projects list shows every budget as a bar, each project page shows hours by task and by person, and project managers and admins get one email when a project crosses the threshold you set. The budgets report lists spent, remaining and percent for every project and exports to CSV.
A project page: budget used and remaining, hours by task and by person.
More on project budgets. For retainers, see how to price a retainer.
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