Alpha Company has implemented a plan whereby functional managers will be held totally responsible for all cost overruns against their (the functional managers') original estimates. Furthermore, all cost overruns must come out of the functional managers' budgets, whether they be overhead or otherwise, not the project budget. What are the advantages and disadvantages of this approach?

The advantages would be efficiency and accountability; the disadvantages would be resource hoarding and low quality.

Explanation:

The advantages of such a plan implemented by Alpha Company would basically be two: first, functional managers would try to be more careful with their budgets, and try to calculate their estimates as best as possible in order not to overrun them. This means resources would be more efficiently spent. Second, because managers will be directly responsible for overruning their budget, this will mean higher accountability. However, there are two important disadvantages of this approach. The first one is that because managers will be very stingy with their budgets, this means they will tend to hoard resources that could be better spent on the project in order not to overrun their budgets. This can lead to parts or the whole project being paralyzed. Another disadvantage is that managers will try to cut corners in order to save as much as possible, which could mean quality being sacrificed in order not to overrun the budget.