Contingency Reserve & Management Reserve

 

Contingency reserve and management reserve are options to respond to risks so that these risks do not compromise the project.

A. Contingency Reserves

1. Termed “known unknowns,” or risks that have been kept in the risk register and can be part of the overall risk response strategy.
2. Project Managers are typically authorized to spend what is in the contingency reserve to address risks as they occur.
3. The project manager is accountable for its use.
4. The main inputs in developing the contingency reserve are the risk register and a quantitative analysis technique used to calculate the cost of each risk.
5. Expected Monetary Value (EMV), a statistical technique, is the quantitative analysis technique used to arrive at such calculations.
6. The two inputs to EMV are the probability of a risk occurring (expressed as a percentage) and the impact of the risk occurring (expressed in some time or monetary measure). Brainstorming and expert judgment could help getting this data. The formula for EMV is:

EMV = probability x impact

B. Management Reserves

1. Termed “unknown unknowns,” are kept aside to cover risks that occur but were not accounted for.
2. Typically set by upper management as a buffer against any unknown risks.
3. Along with the cost baseline (cost estimates + contingency reserves), the management reserve is the final piece of the cost budget.

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