Top-Down Budgeting: Disadvantages*

There are, however, several disadvantages to the top-down approach. First, the lower level managers often feel that their share of the project budget is insufficient for the tasks to be accomplished. In addition, when senior mangers remain steadfast to their budgetary position, the lower level managers feel that they have no choice other than accepting what they perceive as insufficient budgetary allocations to accomplish the work for which they are responsible. Second, as the various departments are competing for a share of the fixed amount of a project budget, the top-down approach can have the net effect of pitting one department against another in the competition for budget money, thereby leading to an adversarial relationship between these departments. Consequently, this process naturally leads to jockeying among different functions as they seek to divide up the budget pie in what has become a zero-sum game--the more budget money engineering receives, the less there is for procurement to use. When functional managers view the budgeting process in this competitive light, there is a strong potential for political behavior, inflated estimates, and other gamesmanship in order to justify inaccurate or deliberately excessive budget requests. In short, top-down budgeting may offer the benefit of relying of top managements' savvy and project management experiences, but it also creates a potentially conflict-laden atmosphere as the lower levels in the organization work to align their specific task budgets with the overall project budget. Clearly, the effectiveness of top-down budgeting depends upon the accuracy and honesty with which it is used. The technique assumes that top management is truly knowledgeable enough to make reasonable cost estimates of the project at hand; if this is, in fact, not the case, the project is immediately saddled with an unrealistic budget that cannot be achieved. Further, some executives use top-down budgeting inappropriately; that is, they may view it as a motivational technique for lower-level managers. Therefore, they will deliberately underestimate the cost of a project in the belief that low estimates on their part will spur cost savings and efficiencies from their subordinates. Either of these approaches is more likely to result in staff demoralization and budget overruns than project success. When used correctly, top-down budgeting can serve as a viable method for cost allocation, but it must be used in accordance with the philosophy that underlies it.

*Please Note: Portions of section 5.3.1 were adapted from Pinto, J. K. (forthcoming). Project Management: Achieving Competitive Advantage. Upper Saddle River, NJ: Prentice Hall.Used with Permission.