Examining the different approaches to building a project budget reveals clear pros and cons of each as well as clearly defining the role of personnel in the process. It is critical to appreciate how the practical side of budgeting (that is, allocations in the context of estimations as well as actual costs) can be affected by the human side of the issue (that is, how different invested parties perceive the process of allocation). It makes sense that perhaps an organization setting a budget for a project should ideally consider each project case-by-case and identify the budgeting approach that makes the most sense for the project, rather than always selecting a particular approach by default.
In considering the relative strengths and weaknesses of each approach, a picture begins to emerge of why one approach may be used over the other and in what context(s). For example, a project (or contract) which is typical of an organization’s function or service and therefore is familiar to the organization’s top management would best be served by a top-down approach. This approach, by its nature, is guided by the organization’s top management. Pinto (2010) describes the assumption which underlines top-down budgeting: “The assumption is that senior management is experienced with past projects and is in a position to provide accurate feedback and estimates of costs for future project ventures” (pp. 243-244).
In other words, a project is likely not the management’s “first rodeo” and they are uniquely positioned to offer relevant insight into how a project is likely to progress and to anticipate problems which would likely dramatically affect the project’s budget. Furthermore, according to Pinto (2010), “research suggests that top management estimates of project costs are often quite accurate, at least in the aggregate” (p. 244). In other words, top management’s experiences with past projects and the budgeting process do appear to give them an estimation expertise which can serve projects well. This combined expertise with planning and budgeting often results in more efficient and cost-controlled efforts, more often preventing cost overruns (Lenfle & Loch, 2010). This leads to the belief that with projects that are familiar, top-down budgeting would be the best approach.
This suggests that bottom-up budgeting might be the best approach for new or novel projects. Since the know-how and expertise of top management may be functionally irrelevant, the input of functional managers becomes critical since they will be better equipped to assess their resources needs than top management (Pinto, 2010). However, this is a time-consuming process (Pinto, 2010), so it’s easy to understand that for the sake of time and efficiency top management might not favor bottom-up as an approach. However, in unknown territory going slow may well be the best approach. Furthermore, it does not take top management out of the process; their role simply changes. In top-down, they’re in control; in bottom-up they’re in oversight.
While this may lead to conflict, according to Pinto (2010), Lenfle and Lock (2010) see the development of project strategy (which includes budgeting) as being a process which ought to be as much bottom-up as top-down. This suggests that using a bottom-up approach to budgeting provides a better understanding to all involved parties of their role in the process. And while the bottom-up approach does require more time and more detailed plans, such specific focus early on in a project may eliminate surprises or mitigate the effects of unforeseen issues which may emerge, especially in projects which qualify as unfamiliar territory for the organization.
It is clear in reviewing these approaches that each has its own advantages and disadvantages. One cannot be said to be better than the other. As in most things it seems evident that the nature of the project and the organization itself – will play a significant role in how the organization determines the most appropriate and efficacious approach to project budgeting.