Contingency and Management Reserve

Let’s begin with defining the Reserves: Reserves are the amount of fund, time, or resources that are estimated from the risk management processes.

PMBOK® Guide Fifth Edition defines reserves as:

“A provision in the project management plan to mitigate cost and/or schedule risk. Often used with a modifier (e.g. Management reserve contingency reserve) to provide further detail on what types of risk are meant to be mitigated.”

As a further explanation, in a project all the work performed as per project identified performance measurement baselines which include scope, schedule and cost baselines. In other words, work is performed for the identified scope with corresponding scheduling and cost of each item in the scope.

As every project result in a unique product, service or result, that’s why we need to consider the uncertainties involved in the project. These uncertain events may affect our ability to achieve project objectives, that’s why reserves are a mechanism to deal with cost and schedule risks.

There are two types of uncertainties involved in the project:

1. Known- Unknown: These uncertain events are identified using “Identify Risks” process, but the amount to which they can affect project objectives is not predictable with a reasonable degree of confidence, known as Known-Unknown risks. After risk and their priority identification, risk response plans are applied using “Plan Risk Responses” process. Risk remains after applying risk response strategies are residual in the risk register. A reserve is identified for these residual risks and known as contingency reserves.
2. Unknown– Unknown: Some risks are not identified using “Identify Risks” process and we are not aware about their identity, amount of probability and time of their occurrence, known as Unknown-Unknown risks. Management reserves are defined to deal with these kinds of risks which are not mentioned in the risk register.

 

PMBOK® Guide Fifth Edition defines reserves as:

“Contingency Reserve: Budget within the cost baseline or performance measurement baseline that is allocated for identified risks that are accepted and for which contingent or mitigating responses are developed. “

“Management Reserve: An amount of the project budget withheld for management control purposes. These are budgets reserved for unforeseen work that is within scope of the project. “

The management reserve is not included in the performance measurement baseline (PMB).

Below mentioned diagram shows difference between contingency and management reserve in the context of performance measurement baseline:

Difference between Contingency and Management Reserves:

Contingency Reserves	Management Reserves
Designed to deal with Known – Unknown uncertainties	Designed to deal with Unknown-Unknown uncertainties.
Developed for the accepted risks remains after applying mitigation, risk response strategies; these are residual risks in the risk register.	Developed for unforeseen events and these are not mentioned in the risk register
Contingency reserves are included in the performance measurement baseline	Management reserves are not included in the performance measurement baseline.
These reserves are used when residual and/or an accepted risk occurs.	Management reserves are used when unforeseen events occur. The amount of time and cost used to account unforeseen work is added to the project performance baseline.
When we move towards project execution, more specific information about the project become available and these reserves may get reduced or eliminated. When accepted risks occur, these reserves are used.	When we move towards project execution these reserves are used when unforeseen risks occurs.
The project manager has complete authority about the usage of these reserves	A formal approval from project sponsor may be required for the usage of management reserve

 

As to recollect:

Contingency Reserve is a cushion for the remaining risks which ensures that if they become reality this reserve should be able to absorb the impact and project team still can deliver in baseline time and duration.

As these are included in the performance measurement baseline, the project manager has authority on their usage. These reserves are used for already identified events and based on availability of precise information as project move through execution; these reserves may be used, reduced or eliminated.

Management Reserve is a kind of reserve to fund unforeseen events, as these are not included performance measurement baseline, their usage may require the involvement of the project sponsor.

Management reserves are included in the project budget and the amount depends on various factors like the ability to recognize customer nature, the complexity of the project etc. Historical records play significant role in designing management reserves.  If you are developing the type of product first, time you may need more reserve. In most of cases a certain percentage of the total identified project cost is allocated as management reserves like 5% of total project cost, again it depends on various above mentioned factors.

I hope this blog has sufficiently answered your all queries related to what are Contingency Reserves and Management Reserves and the basic differences underlying them. Good Luck with your PMP® Certification Exam.