Zero-Based WHAT? A Guide to Zero-Based Budgeting and Zero-Based Analysis
You may have heard “zero-based ____” used to describe a project plan or budget, but what does it mean?
This article will go through the difference between Zero-Based Budgeting (ZBB) and Zero-Based Analysis (ZBA), and how project leaders can apply both tools to improve their next project.
1) Zero-Based Budgeting (ZBB)
ZBB is an approach where a new budget is developed from scratch each time. You start from "zero" instead of starting with a budget from a previous estimate or year. The intent is to highlight and justify all expenditures without being clouded or biased by the previous budgets' assumptions.
In practice, ZBB digs a bit deeper than the traditional budgeting approach process by determining each cost item's validity and a reliable amount.
When applied to capital projects, ZBB can identify budgeting opportunities in an existing plan (i.e. reducing the "hidden" construction allowances), but it doesn't aim to uncover potential upside from changing the fundamental scope or execution strategy itself.
Zero-Based Budgeting (ZBB) is used to justify all the expenditures that make up a budget.
2) Zero-Based Analysis (ZBA)
Zero-Based Analysis (ZBA) is a Stroud-developed approach used to uncover all potential opportunity within a project.
ZBA starts by answering the question: “What would the project look like in a perfect world?”
The main principle is to identify the “theoretical best” project that:
Achieves all the required safety and operability
With the minimum scope needed at the least cost
With an optimized schedule that:
Best leverages the resources available.
ZBA then compares this “perfect world” scenario to the current project plan to identify all the opportunities within the project scope, design, execution strategy, schedule and budget. It “turns over every rock” to get every possible source of opportunity on the table.
ZBA typically identifies 3-5 times more opportunity than previously known through investigating less visible or understood value drivers and healthily challenging assumptions and constraints.
Your team can then prioritize these opportunities by value and complexity and pursue the top items with the “biggest bang for the buck”.
The ZBA process focuses on building alignment by systematically capturing all upside (not relying on opinions or biases), being completely open and transparent about what will and will not be pursued, and ultimately letting the facts speak for themselves.
Zero-Based Analysis (ZBA) is used to determine theoretically how small all expenditures can be and prioritize the top ones to pursue.
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