Contingency Reserve vs Management Reserve
Contingency Reserve vs Management Reserve is an important topic for PMP Certification exam. You may encounter some questions related with the reserves. Calculating reserves is a part of a project’s risk management process. Basically a project’s risk management process starts with risk identification and qualification. Then proceeds with calculating the management reserve and contingency reserve. The Project Management Body of Knowledge (PMBOK) defines reserves as a provision in the project management plan mitigate cost and/or schedule risk. This article reviews the topic contingency reserve and management reserve with help of real life examples.
Contingency Reserve and Management Reserve in Risk Management
Reserves provide a budget against project’s risks. These risks may be either known or unknown risks. Contingency and management reserves are added to the project’s budget to manage potential risks.
Contingency reserve and management reserve sounds similar. Thus many practitioner think that they are identical. Likewise some professionals think that their purposes and calculation methods are similar. However they refer to different concepts.
Note that both contingency reserve and management reserve can be used to response both positive and negative risks.
Contingency reserve is a fund added to the cost baseline against identified risks. They are used to develop risk response strategies and mitigate the effects of the known-unknowns (or identified risks).
Simply we can say that Contingency Reserve is a planned amount of fund, time or resource which is added to an estimate for risks that might happen (also known as “known unknowns”).
Contingency Reserves are involved in the performance measurement baseline and the project manager has authority to use when any identified risk happens.
Contingency reserve is a computable reserve that can de calculated by the help of techniques such as Monte Carlo Analysis, Decision Tree Analysis and EMV (Expected Monetary Value etc. Don’t forget that risk register plays a key role while calculating the contingency reserve of a project.
The PMBOK Guide defines the management reserve as an amount of the project budget withheld for management control purposes.
Management reserve is not a computable reserve and it is not a part of the cost baseline.
In other words, Management Reserve is a planned amount of fund, time or resource which is added to an estimate for unforeseeable situations (also known as “unknown unknowns”).
Management Reserves are involved in the projects budget but the project manager should get approval from the project sponsor in order to use it.
Management Reserves can be determined by using historical records, by taking into consideration the project complexity and by recognizing customer nature. If you are preparing a complex project budget first time, you can assume management reserves 5% of total project cost. But don’t forget it depends on many factors.
Management reserve is used to develop risk response strategies against to the unknown-unknowns (or unidentified risks). Therefore it can not be used for schedule compression ,gold plating and covering cost overruns.
Contingency Reserve and Management Reserve Examples
For better understanding the difference between Contingency Reserve vs Management Reserve, let’s look at the example below.
Let’ s assume that you are a project manager of a bridge construction project.
• 3 days ago a storm demolished some parts of the bridge. As a project manager, you have authority to use the Contingency Reserve to repair the demolished parts. Because this risk was defined in the risk management plan and fund has been added for this situation.
• Your project is not on a known earthquake zone so earthquakes are not considered as a risk (threat) to your project. But an earthquake happened last week and destroyed some parts of your bridge. As a project manager, you reported the event to your top management and asked their permission to use the Management Reserve to repair the destroyed parts.
As it is mentioned above, contingency reserve and management reserve serve different purposes and they are not identical. For better understanding, let’s review the differences below;
- Contingency reserve is a budget or time to be used to response known-unknowns (or identified risks). On the other hand management reserve is used to response unknown-unknowns (or unidentified risks).
- Contingency reserve is a computable reserve that can de calculated by the help of techniques. Management reserve is not a computable reserve. It can be added as a percentage of total project costs (or duration).
- Since contingency reserve is added to the cost baseline, the project manager has authority to use it. However the project manager must get approval to use management reserve.
- Contingency reserve is a part of cost baseline (or schedule baseline) where management reserve is not a part of the cost or schedule baseline.
- Contingency reserve can be removed when the identified risk does not occur. However a management approval is required to remove the management reserve.
Effective risk management plays a key role for a project’s success. Contingency Reserve and Management Reserve are used to manage identified and unidentified risks. Contingency Reserve can be calculated by the help of techniques such as Monte Carlo Analysis, Decision Tree Analysis and EMV (Expected Monetary Value). However it is not easy to estimate Management Reserve. Mostly it can be thinkable as a percentage of total project cost.
Note that Contingency Reserve vs Management Reserve is an important topic for PMP Certification exam. There may be one or more than one questions related with the topic.