Question

"Fill in the blank" question: select the correct answer.

Serge has given you a budget that includes costs for subcontractors that are 15% higher than what you originally anticipated. When you ask him about it, he says, "You know how those subs are. They never come in on budget. I thought it would be better to add in the extra cost up front." This an example of _______.
a. contingency reserves
b. management reserves
c. padding

Answer 1

Serge's action of adding extra costs to the subcontractors' budget is known as padding. Padding is different from contingency and management reserves, as it is an informal practice without detailed risk analysis.

Step-by-step explanation:

Serge has given you a budget that includes costs for subcontractors that are 15% higher than what you originally anticipated. This is an example of c. padding. In a budgeting context, padding refers to the practice of adding extra funds to estimates or actual expected costs to create a cushion for unexpected expenses. Unlike contingency reserves, which are funds set aside for identified potential risks, padding is often an informal addition to the budget without a detailed risk analysis. Similarly, management reserves are also a formal budgetary provision for unforeseen management-level adjustments, but they too are distinguished from padding by their structured approach.

Understanding different budgetary practices is crucial in managing finances effectively and making informed decisions. For instance, knowing about biases such as the anchoring bias can help individuals and organizations avoid being swayed by irrelevant information when considering their financial options.