This paper presents an error budget methodology for designing and characterizing machines used to manufacture or inspect parts with spatial frequency-based specifications. In this methodology, the static and dynamic error are considered in the error budget; the static error affects the figure accuracy, while the dynamic error introduces the spatial frequency domain error. The error caused by the components of the machine tool, the cutting process and the external interference, are considered in this paper. Using the error budget, it is able to minimize risk during initial stages by ensuring that the machine will produce components that meet specifications before the machine is actually built or purchased. This methodology is used to predict and improve the performance of an ultraprecision flycutting machine tool.