You are facing a common problem, particularly when incentive systems are based upon performance to plan or constraints are about to be imposed. Budgeting is a disciplined process. The most rigorous is to begin to institute "Activity Based Costing" and to enforce a process as though you were budgeting a production department. Taking last year and adding X% is not acceptable. I suggest the following:
1. Identify each function as though it were a separate department
2. Define each project expected by each function/department.
3. Divide the spending in each function/department into fixed and variable expenses where the fixed is the bare minimum needed for coverage in each (supervisor payroll & related; equipment charges, utilities, etc.)
4. Identify the variable costs (minimum staffing, travel, space, etc.) for each project multiplied by the probability that the project will move forward.
5. Permit some contingency (5%??) for each. You may need to allow for unplanned activity depending upon the project management history in the department.
6. Once this ABC budget is prepared, then compare this with the trend of actual of each for the last 2-3 years.
You may be very surprised at how much excess is already in place. If you need some assistance, I can help you prepare budget templates with which to work. Good luck.
Gary
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