What is padding the budget?

Written by danielle delee
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What is padding the budget?
Padding the budget is a controversial practice because it breeds wastefulness and is inherently deceptive. (Getty Images)

Padding the budget is a practice that some people use in business when submitting a budget for approval. It artificially inflates the proposed budget in order to give the project room to expand or to cover unexpected costs. Many see budget padding as unethical, but its practitioners defend it on the grounds of practicality.

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Definition

Padding the budget means making the budget proposal larger than the actual estimates for the project. This is done either by increasing a project's expenses or decreasing its expected revenue. The goal of budget padding is to get an approval committee to grant an artificially high level of funding to the budget maker's proposed project. There is some contention over the exact definition of padding: some contend that inflating expenses to take expected inflation into account is responsible foresight rather than padding, while others see any increase beyond current estimates as padding.

Incentives

Budget makers face several incentives to pad their budgets. First, they want to account for economic factors. This is true of budget increases that anticipate inflation or, in the case of international projects, fluctuations in exchange rates. Second, they want to avoid red tape. If an unexpected expense arises, the padding gives the project flexibility to cover it --- that is called slack or breathing room. Third, they want to make a favourable impression on their superiors. If they propose a larger budget and then outperform the budget, then the project team will be viewed favourably by the bosses. Finally, they fear budget cuts. Some budget padders fight against cuts that they see as unfair by anticipating them with an inflated proposal.

Consequences

In theory, projects should spend according to the accurate budget estimates so that padding would have no real effect. In practice, however, budget padding has concrete consequences. Projects with extra room in their budget tend to use it. Recurring projects, especially, spend money unnecessarily in order to use up their entire budgets. That way, the approval committee does not cut their budgets in the following year.

Ethical considerations

Aside from the financial consequences, many people question the acceptability of budget padding because it is a deceptive practice. They say that it breeds a harmful corporate atmosphere. Budget padding's defenders cite its widespread use as a justification of its acceptability. They also argue that unfair actions on the part of bosses, like budget cuts, force them into pre-emptive budget inflation.

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