4.1 Manage by Exception

What Manage by Exception Means

Manage by exception delegates authority to a lower level with defined tolerances for each performance target, so that each level can self-manage within agreed limits and escalate only when a forecast breaches those limits. The principle prevents micro-management: the Project Board does not need to supervise every task the Project Manager performs, and the Project Manager does not need to supervise every Team Manager task — provided work stays within tolerance.

Tolerances and performance targets

PRINCE2 7 defines tolerances against seven performance targets: time, cost, scope, quality, risk, benefits, and sustainability. A tolerance is the permitted deviation from a planned target before the next level of management must be informed. Tolerances may be expressed as plus/minus percentages, absolute ranges, or qualitative bands.

Three tolerance levels

Tolerances are set at three levels, each by the level above:

1. Project tolerance — set by programme or corporate management; defines the permitted deviation for the whole project against the mandate and business case.
2. Stage tolerance — set by the Project Board for each management stage; the Project Manager manages the stage within these limits.
3. Team/Work Package tolerance — set by the Project Manager for each Work Package; the Team Manager works within these limits and escalates to the PM on breach.

Exception reporting

When a forecast indicates a tolerance will be breached, an Exception Report is produced by the level below and sent to the level above. For a stage tolerance breach, the Project Manager produces the Exception Report and submits it to the Project Board. For a Work Package tolerance breach, the Team Manager produces one for the Project Manager. The Exception Report describes the deviation, its impact, and options for recovery.

The receiving level then decides between:

• Give advice and ask the lower level to recover the situation within tolerance.
• Defer the decision (for example, request more information or an updated plan).
• Halt the project or stage.
• Premature closure of the project.

Six exception types

PRINCE2 recognises six exception types, each tied to a performance target where tolerance is forecast to be exceeded: scope exception, quality exception, benefit exception, risk exception, cost exception, and time exception. A deviation against a sustainability target is handled the same way where a sustainability tolerance has been agreed. The principle is that the right people are informed at the right time — not every variance, only those that exceed the permitted deviation.

Who sets tolerance for whom

A common exam trap is confusing which level sets tolerance for which. The rule is tolerances are always set by the level above the one that works within them:

A Project Manager cannot set stage tolerance — only the board can. A Team Manager cannot set Work Package tolerance — only the PM can. Corporate or programme management sets project tolerance because the board itself is the delegated authority working within it.

Worked scenario — a stage cost-tolerance breach

A stage has a budget of £400,000 with a cost tolerance of +5% (i.e. a £420,000 ceiling). Six weeks in, the Project Manager's latest forecast puts stage spend at £435,000 — a forecast breach of £15,000 above the permitted ceiling.

1. The Project Manager does not wait for the stage to end over budget. Because the forecast breaches tolerance, the PM raises an Exception Report now.
2. The Exception Report describes the deviation (forecast £435,000 vs ceiling £420,000), the cause (a supplier rate increase), the impact (project-level cost tolerance still intact, but stage tolerance gone), and options (descoping one optional product, renegotiating the rate, or requesting a stage tolerance increase).
3. The Project Board receives the Exception Report and chooses one of four responses: give advice (direct the PM to descope the optional product and recover within the existing ceiling), defer (request an updated plan or more information before deciding), halt the stage while the situation is resolved, or order premature closure of the project if the Business Case is no longer viable.
4. Only the Project Board can adjust stage tolerance. If the board agrees a +10% ceiling (£440,000), the PM continues within the new limit. The PM cannot authorise that increase themselves.
5. If the forecast had also threatened project tolerance, the board would escalate to corporate or programme management — because only that level can adjust project tolerance.

Common traps in exception questions

• Waiting for actual breach. A forecast breach is enough — the Exception Report is raised when the deviation is predicted, not when it is confirmed at stage end.
• PM adjusting stage tolerance. Only the board can do this; the PM can only adjust Work Package tolerance (and only for Work Packages they set).
• Confusing Exception Report with Issue Report. An Issue Report records a problem that may or may not breach tolerance; an Exception Report is specifically a forecast breach of tolerance requiring the level above to decide.
• Assuming every variance escalates. Small variances within tolerance are handled by the level that holds the tolerance — only breaches go up.
• Forgetting sustainability. Where a sustainability tolerance has been agreed (e.g. a carbon cap), a forecast breach is a sustainability exception handled the same way as the other six types.

Common exam scenarios

Exam questions often describe a forecast breach and test who is notified, what the PM produces, and what the board may do. Remember: a forecast breach triggers the Exception Report — you do not wait until the tolerance is actually broken at the end of the stage. The Project Board, not the PM, decides how to respond to a stage-level exception. The PM cannot authorise their own tolerance increase for the stage; only the board can adjust stage tolerance, and only corporate or programme management can adjust project tolerance.