Which is Better? A Budget with “Challenge” or a Budget with “Reserve”?

In the defense contracting world budgeting is typically done under a rigorous “earned value management system” (EVMS) that usually includes keeping aside 10% of the budget for use as a “management reserve”.  This can then be doled out in bits and pieces as needed to fund changes in what needs to be done (“scope” in the project-organized world) and solutions for problems that arise during the course of business.  It also allows people within the organization to cope with unexpected changes without feeling like they are endangering the project or organization when they have to ask for more funding.  They all still have to do what they can to stay within budget, but it gives the appearance that upper management accepts that unexpected changes happen and are going to be reasonable in helping people dealing with them.  That’s not how budgets are typically presented in the rest of the business world, however.

A lot of businesses do only “best case” planning.   Alternatively, mostly outside the defense industry, I have often have seen budgets set up with “challenge”, meaning that the requesters didn’t get all they asked for and upper management was challenging them to do the work for less than they had requested.  While at the bottom this seems like the same thing as the management reserve, I believe the way it is presented sends a different set of messages to the team and puts pressure on them to “do it for less”.  The unspoken messages may insinuate that “you gold plate things”, “we have no faith in your estimates”, or “I think you’re trying to “game” the system for more money than you need”.

 Either approach can cause people to both cut corners and innovate, with good or bad outcomes, but I believe the way people feel under the two approaches differs, including their perception of management and how issues should be dealt with in the course of business.  What differences do you see in the effects and outcomes from these differing approaches?  Which approach do you favor and why, and what related factors and side effects play into or come out of these scenarios?

Thanks for reading, thinking and sharing.  – Tim


One Response to Which is Better? A Budget with “Challenge” or a Budget with “Reserve”?

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