Budget Control

Budget controls are necessary to ensure that a government does not spend more than the amount legally appropriated by its governing body. By establishing clear spending boundaries, budget controls also promote accountability and bolster trust throughout the organization. 

Budget controls are applied to individual financial transactions and can be classified as “hard” or “soft.” A hard budget control does not allow a financial transaction, such as encumbering funds for a purchase order, paying an invoice, or approving a personnel requisition, to proceed if there are not sufficient funds available to cover the cost of the transaction in the budget. Conversely, a soft budget control does allow the financial transaction to proceed, but often with an alert to the staff personnel or a request for an additional level of approval.

As shown in the table below, budget control and budget monitoring are closely related, but vary slightly in their application. Budget controls are focused on budget availability and only come into play when a transaction exceeds the budgeted limit. Budget monitoring is an on-going activity that is useful throughout the entire budget cycle.  It consists of reports and dashboards that show how the organization has spent or committed its budget up to the current time period and information related to performance of both operations and revenue. Using budget controls and budget monitoring together is the most effective way a government can manage its budget.  (See GFOA’s Best Practice on Budget Monitoring for more information).

Budget controls should be automated and built into the organization’s enterprise resource planning (ERP) system. Most modern ERP systems offer extensive budget control functionality.   

Utilizing the organization’s chart of accounts, automated budget controls can be implemented at a variety of levels, such as fund, department, program, or object/account. (For more information on developing a chart of accounts, see “Implementing a New ERP System? Take the Opportunity to Develop a New Chart of Accounts.”) Hard budget controls are most efficient when implemented at the level of legal appropriation.  When implemented at a more detailed level than the level of appropriation, hard budget controls can lead to an increased need for budget transfers or amendments. Controlling the budget at a very detailed level can also decrease managers’ flexibility to respond to changing needs and priorities throughout the year. One way to balance the need for flexibility with the need to maintain control at a more detailed level is to implement soft budget controls that would trigger a notification, an additional approval, or initiate a budget transfer request.

A government’s budget should not function solely as an estimate of how much money it expects to collect and spend in the upcoming year.  Rather, it should function as an operational plan that outlines the organization’s goals and how it plans to achieve those goals. By holding staff accountable to the plan, budget controls and budget monitoring reinforce this important role for the budget. Budget controls complement budget monitoring by providing the necessary real-time safeguards to ensure that staff are spending money consistent with the plan.

While a government’s budget is a plan, it is not a static plan.  In order for government to serve its residents, it must be able to respond to changing conditions, needs, and priorities.  Budget controls are also useful for this purpose. As a management tool, they not only prevent overspending; they also bring attention to potential changes that may need to be made to the organization’s budget.

Below are examples of different types of budget controls for non-personnel, personnel, and capital spending:

Non-personnel Budget Controls

• Requisitions and pre-encumbrances
• Purchase orders and encumbrances
• Procurement policies and procedures, including placing strict limits on “direct payments” (i.e., payments to vendors that are not connected to a purchase order or contract)
• Purchasing card policies and procedures, including limits on the amount and type of purchases a p-card can be used for
• Automated budget checks to ensure funds are available for pre-encumbrance, encumbrance, and final payment  

Personnel Budget Controls

• Position control: organization should maintain one master list of all budgeted positions, which is updated regularly with information on filled and vacant positions
• Required approvals for posting positions and hiring candidates
• Prohibition on over-filling both part-time and full-time positions
• Requiring approvals for overtime
• Limiting accrual of vacation time and compensatory (comp) time

Capital Project Budget Controls

• Requisitions and pre-encumbrances
• Purchase orders and encumbrances
• Competitive bidding and contracts for all projects
• Contract change order policies and procedures
• Project close-out policies and procedures
• Policies and procedures regarding carryover of purchase orders and encumbrances from one fiscal year to the next in the case of multi-year projects