Manage by exception

The fifth principle states that a PRINCE2 project has defined tolerances for each project objective, to establish limits of delegated authority. Each level of management is given an objective and a tolerance by the level above. As long as the objective is forecast to be met within tolerance, the lower level gets on with the work and the upper level stays informed but does not intervene. When a tolerance is forecast to be exceeded, the situation is an exception and must be escalated. Managing by exception lets senior people direct without micromanaging and lets people closer to the work act without constant permission.

Tolerances on seven performance targets

PRINCE2 7 defines seven performance targets for which tolerances can be set: time, cost, scope, quality, benefits, risk and sustainability. Sustainability was added in the 2023 edition to reflect the growing expectation that projects manage their environmental, social and governance effects.

Not every tolerance needs to be numerical, and not every target needs a tolerance on every project. Scope tolerance is often expressed through prioritization, such as the MoSCoW categories of must have, should have, could have and won't have this time. Quality tolerance sits in the quality criteria of product descriptions. What matters is that each level knows the limits of its authority.

Four levels, three sets of tolerance

Tolerances cascade down the management levels.

• Corporate, programme or business management sets project tolerances for the project board, usually in the project mandate or brief.
• The project board sets stage tolerances for the project manager when it authorizes each stage plan.
• The project manager sets work package tolerances for team managers when authorizing each work package.

If a team manager forecasts that a work package will exceed its tolerance, they raise an issue with the project manager. If the project manager forecasts that the stage will exceed its tolerance, they raise an exception report to the board. If the board forecasts that the project will exceed project tolerance, it escalates to corporate or business management. Each level handles what it can within its authority and escalates only what it cannot.

Forecast, not actual

An important detail is that escalation is triggered by a forecast breach, not an actual one. The project manager does not wait until the stage has overspent; they escalate as soon as the forecast shows that tolerance will be exceeded. Waiting until the breach has happened removes the board's chance to choose a different course. This is why PRINCE2 progress reporting asks for forecasts against tolerance, not just actuals to date.

Reporting by exception

Manage by exception reduces the need for the board to meet often. Between stage boundaries, the board receives highlight reports at an agreed frequency, perhaps fortnightly or monthly. These are short status summaries, not requests for decisions. Team managers send checkpoint reports to the project manager. The board only needs to act when something is outside tolerance or when the project manager asks for advice. A board that demands weekly detailed task reviews is undermining the principle, because it is pulling management decisions up a level.

Exceptions handled step by step

When a stage is forecast to exceed its tolerance, PRINCE2 sets out a clear sequence.

1. The project manager raises an exception report describing the cause, consequences, options and a recommendation.

2. The board considers the report. It may increase tolerance, ask for an exception plan, or prematurely close the project.

3. If an exception plan is requested, the project manager produces it in managing a stage boundary, with an updated business case and project plan.

4. The board approves the exception plan, which replaces the current stage plan, and the stage continues under new tolerances.

Setting tolerances well

Tolerances that are too tight cause a flood of exceptions and push routine decisions up to the board. Tolerances that are too loose remove the board's control. Good tolerances reflect the board's risk appetite, the uncertainty in the estimates and the consequences of deviation. Early stages with uncertain estimates may justify wider tolerances; later stages with firmer plans may justify narrower ones. Tolerances should be recorded in the stage plan or work package, so there is no argument later about what was agreed.

Tolerances can also be asymmetric. Many boards are relaxed about finishing early or under budget but strict about finishing late or over budget, so a time tolerance of +2 weeks / −4 weeks is common. On fixed-date projects, such as an event or a regulatory deadline, time tolerance may be zero, and scope tolerance becomes the main flexibility.

Issues within tolerance

Not every problem is an exception. A team manager who is a few days late on a work package, but still within work package tolerance, simply recovers the time or reports it in a checkpoint report. A project manager facing an issue that can be resolved within stage tolerance may take corrective action without involving the board, recording the issue in the issue register. Only forecast breaches go up a level. This is what keeps senior people's attention on the decisions that matter.

Failure modes

Tolerance on risk

Risk tolerance is often the least understood of the seven. It does not mean the project tolerates any risk; it sets limits on the risk exposure the project manager may accept without escalation. A risk tolerance might say that any individual risk with an expected monetary value above a set amount, or any risk that could affect safety, must be referred to the board. Expected monetary value is calculated as probability multiplied by impact.

Quality and benefits tolerance in practice

Quality tolerance is usually set inside product descriptions. A product description for a call-handling system might say that average call answer time must be 20 seconds, with a tolerance of 18 to 25 seconds. If testing shows 27 seconds, the product is outside quality tolerance; the team manager raises an issue, and if the problem cannot be fixed within work package tolerance it escalates. Benefits tolerance, as Lesson 2 showed, is set in the business case and protects the reason the project exists.

Sustainability tolerance is newer and still developing in many organizations. It might limit carbon emissions from construction, require a minimum share of recycled materials, or set targets for social value such as local employment. Its inclusion in PRINCE2 7 reflects the expectation that projects report on environmental and social effects as seriously as on cost and time.

Delegation as empowerment

Manage by exception is sometimes described only as a control mechanism, but it is equally about empowerment. Within tolerance, the project manager and team managers have authority to make decisions without asking permission. That authority motivates people, speeds decisions and puts choices in the hands of those who understand the detail. A board that sets sensible tolerances and then trusts the project manager to work within them gets better information, because the project manager has no reason to hide small problems. A board that intervenes in everything gets defensive reporting and slower progress.