5th Edition PMBOK® GUIDE—Chapter 7: Contingency Reserves and Management Reserves


1. Contingency Reserves and Management Reserves

Every project faces risks that some event may occur which may impact the project’s schedule. That is why it is necessary to list the known or predictable risks before the start of a project and list them in the risk register. The next step in dealing with the risks is in devising a risk response strategy in case they occur.

To fund these risk responses, a project manager needs to set up contingency reserves, the contingency in this case being if a certain risk occurs at some point in the project. These contingency reserves are in control of the project manager, and the funds are spent out of these reserves if the predicted risk actually does comes about.

However, there may be risks that are unknown or not predicted in advance. You cannot develop a risk response in advance because you don’t know what the risks are going to be in advance. If a risk occurs that is not predicted, you need to develop a workaround or ad hoc solution to the problem. How are these workarounds funded? With management reserves. The amount of these reserves is determined before the project begins, but as opposed to contingency reserves, they are not under control of the project manager. The project sponsor must approve their use, and that is why a project sponsor must be notified if one of these “unknown” or unpredicted risks occurs, because that sponsor will have to

approve the use of funds from the management reserves in order to deal with the problem.

The two levels of reserves mean that there are three separate categories of cost aggregation to deal with on a project.

2. Cost Estimate, Cost Baseline, and Project Budget

The cost estimate for all the work packages is aggregated or “rolled up” the various levels of the WBS or Work Breakdown Structure, including the “control accounts,” until one gets to the level of the entire project, and this is the cost estimate for the project itself.

That is the first cost aggregation to be aware of. The contingency reserves mentioned in the first section are added to the cost estimate to get the cost baseline. This is the performance baseline against which the actual performance of the project will be measured. Note that, if certain risks do not occur during the project, then the contingency reserves to be used to respond to those risks will shrink during the course of the project, and the cost performance of the project will therefore improve automatically.

Then the management reserves are added to the cost baseline to yield the project budget. These funds are moved from the project budget into the cost baseline usually by the following procedure:

  1. An unknown or unpredicted risk occurs.
  2. A workaround to deal with the unknown risk is proposed.
  3. This proposal is put in the form of a change request, and is analyzed in the change control process, which must include the project sponsor.
  4. If the change is approved by the project sponsor in the change control process, then the funds from the management reserve are released from the project budget into the cost baseline.
  5. However, the performance of the project will continue to be measured not against the project budget, but the cost baseline.

The 5th Edition PMBOK® Guide not only does a better job of explaining the difference between contingency and management reserves than the 4th Edition did, but there is a helpful chart to show the difference on p. 213. If you purchase the 5th Edition in hardcover or download it electronically (which you can do if you are a member of PMI), you can refer to this chart which is more elaborate the conceptual scheme I have posted above.

The next post will go to the next process after the last process for Time Management in the Planning Process Group, 7.3 Determine Budget, namely the one in the Monitoring & Controlling Process Group, called process 7.4 Control Costs.

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4 Responses

  1. […] 4SquareReview ProjectManagement.com PMStudyCircle PMI.org […]

  2. Hi,
    You do the 3 point estimate (for Time and Cost) based on risk available in project charter and doing so you may uncover some additional risks.
    These risk along with the ones identified during project initiation are dealt with risk management.
    During risk management you prepare risk response but, some residual risk remains even after risk response planning.
    Now my question is, we keep contingency reserve to “cover cost for risk response that we created” or for the “residual risk remaining that remains after risk response planning” or for both.

    Regards,
    Shoeb.

    • Dear Shoeb: Thank you very much for your question, which is a very good one. The contingency reserves are specifically for those risks which are identified on the risk register (as part of the Identify Risks process), and the reserves are designed to pay for the risk responses that have been prepared (as part of the Develop Risk Responses process). If there are residual risks that remain after risk response planning, those are usually considered to have either low probability or low impact (or both) and are risks which can be accepted (i.e., without developing a specific risk response). Let’s say one of those residual risks does occur. If there is a risk that occurs without that has no specific risk response planned, then the project team has to come up with a solution to deal with that issue, and that solution is called a “workaround.” The money for workarounds to deal with unplanned-for risks comes instead from management reserves. These, as the name implies, must be approved by management. I hope this answers your question, and thanks again for asking it, as well as for reading my blog!

  3. Thanks in support of sharing such a fastidious thought,
    post is fastidious, thats why i have read it completely

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