Contingency Reserve vs Management Reserve

Risks occur in every project and as a project manager, it is your responsibility to manage them as they occur. These risks can be identified or unidentified. If these risks are identified, you will implement the contingency plan; otherwise, you will manage them through aworkaround。

来manage these risks, you will use the contingency reserve and management reserve. These reserves are defined during therisk management planningprocess. The contingency reserve and management reserve provide you with a cushion against the risks and are part of your project budget.

Many professionals assume these reserves are the same since they serve the same purpose. Generally, small and medium-sized organizations do not differentiate between them and take them as a percentage of the project cost to keep things simple. Therefore, professionals that have experience with theseorganizationsmay not know the difference between contingency and management reserves.

Contingency Reserve

You manage identified risks with the contingency reserve. This reserve can be in either cost or time.

The contingency reserve is not random; it is an estimated reserve based on various risk management techniques.

Project managers control this reserve; they have full authority to use it whenever an identified risk occurs. They can also delegate this authority to a risk owner. The risk owner will manage it and update the project manager in later stages.

How to Calculate the Contingency Reserve

有各种各样的技术来计算体积ingency reserve. Some of them are as follows:

• Percentage of the Project’s Cost
• Expected Monetary Value
• 决策树分析
• Monte Carlo Simulation

现在，我们将详细讨论每种技术。

Percentage of the Project’s Cost

Small and medium-sized organizations use this technique for small projects; it helps save money and resources.

Basically, you take a percentage of the cost of the project to calculate the contingency reserve, which usually lies between 3% and 10%. This number is based mainly on the perceived risk of the project.

Expected Monetary Value

Expected monetary valueis a statistical technique used to quantify risks and help calculate the contingency reserve. This technique is used in medium to high-cost projects, where the stakes are too high to risk the project failing.

首先，要找到预期的货币价值，您将计算每个事件的概率和影响，然后将它们倍增以生成每个风险的EMV。

Expected Monetary Value (EMV) = Probability * Impact

Then add the calculated EMV of all identified risks together.

Example

假设您有四个具有概率和影响的风险：

From the above table, you could argue that the funds needed to manage all identified risks is 4,500 USD, but this would be incorrect.

Not allpossible risksare guaranteed; some may happen and some may not. All risks will add their EMV to the pool. The risks that do occur will use money from the pool, but the risks that do not occur will help cover the cost of those that did.

In the above scenario, you may need to add 1,100 USD to your budget to cover all identified risks.

当您有很多风险时，预期的货币价值概念效果很好，因为您可以识别的越多，储备的传播就越好。如果您确定风险较少，则不会有足够的差异，并且储备可能会枯竭。

The EMV technique has a few drawbacks, which include:

• You assume that all risks are independent, which is not always the case.
• If the number of risks is small, the spread will be less, and the reserve may be insufficient.
• There is a chance of avoiding positive risks, which may lead to a false result.

决策树分析

Decision tree analysis is a quantitative risk analysis technique. This technique helps you select the best choice. This is a graphical technique that looks like a tree, hence its name.

在这里，您确定每个事件的预期货币价值，然后选择最佳选择。

Example:

Calculate the expected monetary value of the best choice.

In this example, you have three choices: Choice A, Choice B, and Choice C.

从上面的图中,所有三个选择represent opportunities. Therefore, you will find the expected monetary value of the three events and go with the most favorable. You are trying to get the maximum profit.

现在，让我们计算所有三个事件的EMV。

In the diagram, you were given the probability of one event, while the probability of the other event is not provided. To find the other probability, you have to subtract the probability of the first event from 100, because the sum of all possible outcomes for one event is 100%.

EMV of Choice A = 0.30*200 + 0.70*400

= 60 + 280

= 340 USD

选择的EMV b = 0.40*300 + 0.60*200

= 120 + 120

= 240 USD

选择的EMV C = 0.2*500 + 0.80*200

= 100 + 160

= 260 USD

您必须选择具有最高EMV的那个，即选择A。

Note that if all risks are negative, you select the least negative option. This is because you want to spend the least amount of money on managing risks.

Monte Carlo Simulation

In 1940, an atomic nuclear scientist named Stanislaw Ulam invented this technique and named it Monte Carlo after the city in Monaco, which is famous for its casinos.

This technique gives several possibilities of outcomes and the probabilities for any choice of action.

例如，我们将讨论Monte Carlo simulationin analyzing a project schedule. To use this technique, you must have duration estimates for each activity.

You have three activities with the following estimates (in months):

根据PERTestimate, these three activities will end in 18.3 months.

最好的情况是，这将需要15个月，在最坏的情况下，可能需要23个月。

Now, if we run the Monte Carlo simulation for these tasks, five hundred times, it will show us results like this:

(The above information is only for illustration purposes and is not from an actual Monte Carlo simulation test result.)

在审查了结果后，您可以确定有2％的机会在16个月内完成该项目，或者有70％的机会在19个月内完成该项目，或者有95％的机会在20个月内完成该项目等等。。

Likewise, you can run the Monte Carlo simulation for the budget.

例如，您可以生成数据，例如在项目成本中增加20,000美元，使您可以在预算内完成该项目的机会70％。如果您向项目成本增加40,000美元，则有95％的机会可以在预算内完成该项目，等等。

So, it’s clear that with the use of this technique you can get valuable information that will help you make better-informed decisions.

As you proceed, you will become more familiar with the situation and you can review this contingency reserve again. If required, this reserve can be reduced and you can release the funds.

Management Reserve

The management reserve is defined as the cost or time reserve that is used to manage the unidentified risks or “unknown-unknown”.

The management reserve is a part of the project budget but not the cost baseline. It is not an estimated reserve; it is a figure that is fashioned according to the organization’s policies.

It can be 5% of the total project cost or duration of the project or it may be as high as 10%. The management reserve is usually estimated based on the uncertainty of the project.

For example, if you are doing a project in which your organization has the expertise and experience, the management reserve will be less. In this case, there is less uncertainty.

However, if you are doing a kind of project new to your organization, the management reserve will be high, because, in this situation, the uncertainty is greater.

The project manager does not control management reserve, the management does. Therefore, the project manager must receive approval to use this reserve whenever any unidentified risk occurs.

Many organizations try to avoid using the management reserve. They think if the project manager has to come to them every time to get approval, then why keep it separate? The project manager can come any time they need extra money; so why have a management reserve?

On the PMP exam, you will see many questions on contingency reserve, management reserve, cost estimate, and the project budget. These are crucial concepts; without these reserves, you cannot estimate the cost baseline and project budget. Therefore, for your easy reference, I am explaining these topics here as well.

Cost Estimate

成本估算是所有人的成本work packagesand is “rolled up” to the top level; this is the total cost of the project.

Cost Baseline

When you add the contingency reserve to the cost estimate, you get the cost baseline.

Cost Baseline = Cost Estimate + Contingency Reserve

请注意，该项目的性能将根据成本基准来衡量。

项目预算

If you add the management reserve to the cost baseline, you will get the project budget.

项目预算= Cost Baseline + Management Reserve

When You Cannot Use the Management Reserve

Management reserve and contingency reserve are different and serve different purposes.

Below are a few cases where you should not use the management reserve.

When You Are Over Budget

You have to estimate the new budget and try to get it approved. You should never use the management reserve to compensate for cost overrun.

The management reserve is for unidentified risks, not to cover the cost overrun.

While Using Schedule Compression Techniques

There are two安排压缩技术: fast tracking and crashing.

Schedule compression may lead to new risks. Identify those risks, prepare a response plan, and calculate the new contingency reserve. You will need to get it approved.

You can revisit your management reserve for a review as well.

However, in crashing, you use extra resources. After you complete the planning for crashing, you have to revisit your risk management planning.

镀金

You should avoidgold platingand you should not use the management reserve for it, this increases the risk and changes the scope.

后备计划

I often receive emails from my visitors asking me why we cannot use the management reserve for the fallback plan.

By definition, the management reserve is used for unknown risks.

A后备计划is not used for unknown risks; it is a plan for known risks when the primary response plan fails. Therefore, you will use the contingency reserve for this plan, not the management reserve.

残留风险

Since residual risks are identified risks, you will use contingency reserve to manage these risks.

The Difference Between Contingency Reserve and Management Reserve

The following are a few differences between the contingency reserve and management reserve:

• The contingency reserve is used to manage identified risks, while the management reserve is used for unidentified risks.
• The contingency reserve is an estimated figure, while the management reserve is a percentage of the cost or duration of the project.
• The project manager has authority over the contingency reserve, while for the management reserve, they need management’s permission.
• The contingency reserve is a part of the performance measurement baseline, while the management reserve is not.

Summary

来complete your project successfully, you will have to be proactive in risk management. The contingency reserve and management reserve are the backbones of your risk management, as they provide you with the means to manage risks. The contingency reserve and management reserve are not the same; they are calculated with different techniques and serve different purposes. The contingency reserve is for identified risks and is a part of your cost baseline while the management reserve is for unidentified risks and is a part of your budget.

This topic is important from a PMP and PMI-RMP exam point of view. You may see a few questions on this topic in your exam.

How do you calculate the management reserve and contingency reserve on your projects? Please share your thoughts in the comments section.