Project Tolerance is used to support the Manage By Exception principle in PRINCE2 and allows for flexibility at various levels within the project.
Too many times we are given a single amount for budget or an exact date for project delivery when the reality is, if we spend $100 more the world will not come to an end; if we are 1 day late, it is likely still OK. The key is to know what are the boundaries on "OK".
PRINCE2 uses the concept of tolerances to answer this question clearly
What is Project Tolerance?
The PRINCE2 Manual (the PMBOK has a similar definition) defines tolerance as:
"The permissible deviation above and below a plan's target for time and cost without escalating the deviation to the next level of management. There may also be tolerance levels for quality, scope, benefits and risk."
While the PMBOK discusses tolerances in terms of time, cost and scope; PRINCE2 expands that conversation to include quality, risk and benefits. It creates a fuller conversation around the impact of an issue on the project as a whole as well as on the ability of the organization to generate benefits.
While Time and Cost tolerances are usually a simple +/- on the date or budget, other tolerances are not necessarily so straight forward.
Often expressed in terms of a topic. For example, a project level risk tolerance statement might be "Any event that may threaten the availability of the bank machine network must be escalated to corporate."
Often expressed as a range of acceptable outcomes on a product or process. For example, if a quality criteria is that the product is red (colour # xxx on the color spectrum, the quality tolerance might be stated as +/- 3 shades on the spectrum.
Often uses words like at least, minimum, maximum and the basic +/-. For example, a benefit tolerance might be "at least a 20% reduction in errors" or "increase in sales by at least $10 million within 1 year, but not more than $25 million." Why put maximum on benefit realization? Usually this will relate to the ability of our infrastructure to handle the increase. If the benefits pass the maximum, then the organization infrastructure may need to be changed to support it.
Can refer to minimum deliverables and is very useful when prioritizing project acceptance criteria - or if the project needs to be de-scoped, perhaps due to a cut in resources. MoSCoW prioritization can be used to determine which items Must, Should, Could or Won't be delivered.
PRINCE2 Tolerance in practice
Tolerance travels down
At the highest level it is the corporate organization that gives authority to a specific project, either directly or through a program. As such the project level tolerances are given to us from above.
Corporate/Programme assigns project level tolerances to the Project Board. The board then assigns stage level tolerances to the project manager and the project manager assigns tolerances to the team manager by way of the work package.
Issues travel up
When the team manager predicts an out of tolerance they raise it to the project manager by way of an issue. If they can sort it out between them without violating the stage tolerances, then all is well. If the stage level tolerances will be violated, then the project manager escalates the situation to the project board by way of an exception. Project level tolerance violations are escalated to Corporate or Programme.
Tolerance allows a higher level authority to say "As long as you perform within these parameters, I am good with that. If you are or predict that you will be performing outside of those parameters then we need to talk." Project tolerance in PRINCE2 is great. It gives the project manager flexibility and it keeps senior managers in control. Once it is working project managers can manage, knowing their limits and senior manager can relax because no news is good news. It works, try it.