Performance-based budgeting is a broad term for a type of budgeting used almost exclusively by public organizations, such as branches of government and programs that governments create. The goal is to create a flexible budgeting system in an area where finances, funds and political agendas are constantly changing. As a result, performance-based budgeting (PBB) focuses on targets rather than limits and makes it easy for plans to accept sudden changes. This carries a few disadvantages.
Limit vs. Target
PBB works with targets and goals. It may set a goal to put computers in 100 schools, for instance, instead of setting a limit on how much money can be spent on computers. While this has its advantages, it also creates difficulties. For instance, how much money should be spent on computers? What types of computers are best suited for the schools in question? A budget with limits helps answer these questions. A budget with only targets can be too nebulous, leading to inaccurate forecasts and over-expenditure.
Another problem with the target system that PBB uses is measurement. Even if a cohesive budget can be developed and the project is carried through to completion, defining completion can pose problems. Some goals can be vague -- improving technology in a school district, for instance. An organization may have conflicting views on when that goal has been reached, which makes it difficult to spot an end for the project and a turning point for the budget.
Because PBB is so vague, it does not present a clear cost framework for organizations to follow. In other words, PBB can create a lot of extra work for analysts. They have to focus on a target, but also perform separate cost analysis to set individual prices on the steps involved. This extra cost analysis is a drain on funds and adds confusion to the budget.
Flexibility is one of the primary advantages of PBB. But it also opens the door for broad changes that can make previous cost analyses and budgets obsolete. PBB places a great deal of strategic power in the hands of public leaders and programs, but these have a habit of changing. A new director may be appointed and switch the target to 500 computers in schools, which requires a complete reworking of the budget.