5th Edition PMBOK Guide–Chapter 7: Reserve Analysis

1.  Introduction

The last tool & technique listed for process 7.4 Control Costs is Reserve Analysis.   Why is this used as a technique for monitoring and controlling costs?   This post will discuss this issue.

2.  Contingency reserve and management reserves

Risks that are identified and put in the risk register should have risk responses prepared.   The funding for those risk responses comes from funds set aside in the contingency reserves.   The contingency reserves are added to the cost estimates to create the cost baseline, against which the performance of the project is measured.    

However, risks may occur that were not identified.   The responses to these unplanned risks are called workarounds and the funds for these come from the management reserves.  The management reserves are added to the cost baseline to create the project budget.

3.  What happens when risks do not occur?

After a probable  risk that may have been identified has not occurred at a point where it was expected it might, the money in the contingency reserves for those risks is no longer needed.   What do you do with those funds?

There are two possibilities, either a) keep the funds in the contingency reserves, or b) remove them from the project budget entirely.   If you keep the funds in the contingency reserves, the cost performance on the project will improve, because those funds will not be used.

But whereas this may improve the CPI for the project you are working on, remember that the funds in the contingency reserves are unused resources, which could be used on another project.   So as a project manager, you might be happy that your CPI goes up on your project, but a program manager or a sponsor has to look at all of the projects of a company as a whole, and would prefer not to waste resources where they are not needed.

So contingency reserves that are not used can be used to adjust the project budget going forward.

4.  What happens when new risk are uncovered?

As a project goes forward, new risks may be identified which were not identified at the beginning of the project in the risk register.   If new risks are identified, then risk responses must be developed, and the funds for these responses must be added to the contingency reserves.

So whether the number of risks decreases or increases, they will affect the budget through the contingency reserves, and that is why the technique of reserve analysis becomes a tool of cost management in this monitoring & controlling process.

The last post regarding this chapter deals with the outputs of the process 7.4 Control Costs, and that is the subject of the next post.

One Response

  1. Good Info;
    thank alot

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