In a case where there are well-known basic requirements, and highly variable-solutions, a budget is essential to curb the tendency to put wants ahead of needs. Take, for example, an automobile purchase. All you need is four wheels. Maybe you need four doors if you have two kids, or a minivan if you have three kids, but you certainly don’t need a sunroof, or a hemi, or a self-parking car. These are luxuries. Maybe you can afford to splurge a bit, but the budget knows there are other needs that take priority, like food, mortgage payments, and utilities.
When we try to take this concept of a budget to the workplace it breaks down. In the workplace, budgets serve one of two purposes: (1) flagging corruption, and (2) investment payback.
When we know about how much money it should take to do a job, we give the responsible person a budget. “Marty, we’ve been attending conferences in Las Vegas for 30 years. We know it costs about $X, so you have a budget of $X and $Y for contingency.” As long as Marty stays within that budget, keeps his receipts, and can avoid having the escort service charges showing up on his company Amex, he’s good to go. If his expense report comes in at twice the expected amount, then he has to justify it.
When you know how much something should cost, this is an efficient model. It delegates spending to the individual and only requires minor oversight from the accounting department.
Note that the budget wasn’t set based on how much money was in the bank, it was based on historical data, and the company decided there was a payback to send Marty to Las Vegas. That’s a fundamental difference between home and workplace budgets: at home we frequently buy stuff with no perceived payback, but at a company every expenditure is an investment. That’s why the function of budgets at home and at work are fundamentally different.
When you don’t have good historical data on a planned expenditure, accounting still needs an estimate. Estimates feedback expected expenditures to whoever is managing the cash flow. Budgets are the present-cost of the expected payback, with interest.
When a company looks at starting a new project, whether it’s done internally or subcontracted, first they get an estimate. Then they compare the estimate to the expected payback, and if it pays back within a certain time-frame (usually a couple of years, but sometimes as short as a few months), they go ahead with the project. However, since projects are, by definition, something you haven’t actually done before, everyone acknowledges that the estimate won’t necessarily be accurate. They will generally approve a budget with an added contingency. They’ve done the calculations to make sure that if the project comes in under that budget, the payback will make the company (and the investors) money.
As the project progresses, the project manager needs to track the actual expenditures against the expected expenditures, and provide updated estimates to accounting. If the estimate goes higher than the approved budget, management has to re-evaluate the viability of the project. They might increase the budget if the payback is good enough, or they might scrap the project.
For home budgets, it’s implied: if you stay within your budget, you’ll make sure to satisfy all your needs, and you’re less likely to find yourself in financial hardship. You have an incentive to stay on budget.
At work, lots of people have their bonuses tied to “performance-to-budget”. If we’re talking about the first purpose of workplace budgets (flagging corruption) where historical data provides a solid prediction of what something should cost, then it makes sense to evaluate someone on their performance to that budget. On the other hand, if we accept that project budgets are based on rather inaccurate estimates, then measuring someone to a project budget isn’t very efficient.
In fact, it leads to all kinds of behaviors we want to avoid. First, people might tend to over-estimate projects because that will raise the budget. This might prevent the company from pursuing projects that could have been profitable. Secondly, project managers tend to play a “numbers game” – using resources from one project that’s going well to pad another project that’s going over. This destroys the accuracy of your project reports; now you won’t know which initiatives really made money. Third, the cost will be evaluated at the end of the project, but the payback continues over a longer time-frame. The project manager will tend to make choices that favor lower cost at the end of the project at the expense of choices that offer higher long-term payback.
Everything I’ve read suggests that (a) project managers have very little influence over the actual success or failure of a project and (b) in any task that requires creativity and out-of-the-box problem solving, offering a performance-incentive reduces performance because you’re replacing an intrinsic motivation with an extrinsic one. The intrinsic one is more powerful.
So why do we tie performance incentives to project budgets? Is there really any research that suggests this works, or are we just extrapolating what we know about purchasing a car, or taking a trip to Las Vegas? As someone who is intrinsically motived, I’ve found budget performance-incentives to be extremely distracting. Surely I’m not the only one, am I?
Does this seem familiar? You start out as a grunt in the trenches designing stuff, writing code, and you keep getting a string of projects to work on with insanely low budgets and short timelines, and you think, “I can do better than this.” You decide you want to manage your own projects, and your boss thinks that’s great because (a) he trusts you, and (b) that’s one less thing for him to do. He starts you off with some small project…
The first thing he asks you for is an estimate. You listen to the scope, give it about 10 minutes of thought, write up an estimate and hand it to him:
You start out on your design. It takes about 3 days. Then you start programming, and you get it all working, and you’re on budget. Excellent! Your boss asks you how it’s going, and you say, “I’m on budget! I just have some testing left to do.” Great, let’s have a review with the customer.
After the review with the customer, it’s clear that half of what you did isn’t going to meet their expectations, and the other half is going to get all messed around because of the first half changing. Damn!
“Well, since we have four weeks, and we’re only two and a half weeks in, we should be ok. I’ll probably have to come in on a weekend.”
So you work your butt off, and the hours are really racking up, but you think you’re going to make it, and all of a sudden, BAM! You have this one annoying problem that you just can’t seem to fix. Maybe it’s a bug in a Windows driver, or a grounding issue, or whatever. It’s something hard, and you burn a whole week trying various solutions trying to solve it. Suddenly you’re overbudget.
After this experience, and a few more like it, you start to get the hint that maybe it’s you. Then you learn there’s an entire industry out there that functions as a support group for people like you: Project Management. You get to go to little two-day project management seminars where they commiserate with you. An instructor gets up and talks about all the common pitfalls of managing a project, and everyone with any experience trying to do it says, “yeah, exactly!”
Then they tell you the solution to this is to impose the tried and true “Project Management Methodology” on it:
This gives you a warm fuzzy feeling. The feeling that you’re back in control of your world, and if you’re into control systems like me, then you’re all about controlling your world.
Now the first step includes the estimation step. You do a work breakdown structure, down to small details, and you assign a best case, probable case, and worst case estimates to each task, and you usually use some pseudo-statistics to come up with a weighted sum of the estimates for all tasks.
This process has worked well, but only in certain industries. If you’re building a house, it works well. If you’re building a skyscraper or a bridge, it works well, particularly if the result is similar to something you’ve done before.
It’s odd that most Project Management books use the “send a man to the moon” example. While that project was completed on time (before the end of the decade), and it achieved the performance goal, it went wayyy over budget. If this was a corporate project, it would be a complete failure. It was only considered a success because it was a government job.
If you’re trying to estimate how long it will take to build a house, the estimate starts with a completed design. Then the Project Manager calls up the framers, roofers, drywallers, electricians, plumbers, etc., and gives them a copy of the blueprints. The plumber has a really good idea, based on the number of fixtures, etc., how much it’s going to cost and how long it will take. He does this all the time.
Software is a different beast. It’s like asking you to estimate the architect’s time when he drew up the blueprints of the house. The construction of the house is analogous to the compiling step in software development. In software, we’ve completely automated that step. We can go from design to prototype in a matter of seconds. What we’re estimating in software development is the design effort, not the construction effort. Unfortunately, before the design is done, we haven’t even figured out what the problems are yet, let alone the solutions.
Computer programming is almost always novel. Repetition is the ultimate sin. If you find repetition, you refactor it out into a re-usable library or module. Each project brings new platforms and technologies, ever higher levels of abstraction, and a novel problem, so we have no baseline to estimate from.
In fact, the easier it is to estimate a project, the less important that project really is. If your job is easy to estimate, it’s probably repetitive enough that it’ll soon be automated away.