This chapter introduces a systems-engineering tool called the performance budget. Budgets like this and their close relatives play a central part in systems engineering and analysis. They also play a key role when communicating performance allocations among system elements. At its root, a budget is a means of estimating the distribution of likely outcomes for a given performance parameter. The approximated performance PDF can be analyzed to identify parameters that exert influence on the likelihood of meeting requirements, as well as those that do not. Identification of the parameters sensitive to system performance is foundational to good design.

This chapter begins with an examination of a typical budget from the literature. The mathematics of such budgets will be derived in some detail so that the underlying assumptions and postulates are clear. Such knowledge can help engineers avoid some mathematical misdemeanors (and worse) that can sometimes occur.

The term "performance budget" is used in the title and text of this chapter, but other terms such as "budget" or “error budget” can be found in the literature and mean the same thing. Another common phrasing names the budget after the subject parameter, such as wavefront, modulation transfer, encircled energy, transmission, pointing stability, etc. There is no standard nomenclature, and readers can deduce from context the precise nature of budgets encountered "in the wild."

The chapter concludes with some professional tips regarding the development and application of budgets in practice.