Contingency Reserve vs Management Reserve for PMP Exam
Reserve, by definition, is the money set aside for unexpected events / contingencies / risks so that the project will still have enough funding to carry on. Setting aside reserves is one of the most important measures to manage project risks. In PMBOK® Guide, reserves can be sub-divided into 2 type: Contingency Reserve and Management Reserve. This post will try to distinguish between the two types of reserves.
Contingency Reserve vs Management Reserve
- Contingency Reserve: contingency reserves are money added to the project cost estimates by the project manager for uncertain events / risks that might happen (also known as “known unknowns”).
- to manage identified risks
- the amount is calculated based on risk management techniques defined in the risk management plan (e.g. Expected Monetary Value (EMV) or Decision Tree Method)
- the project manager has the full authority to make use of the contingency reserve once the risk(s) has/have materialized
- contingency reserve is included in the cost baseline (Cost Baseline = Project Cost Estimate + Contingency Reserve)
- once a risk is not realized, the contingency reserve set aside for that risk would be released
- Management Reserve: management reserves are money added to the project overall budget by the senior management for uncertain events that are not even thought of (also known as “unknown unknowns”, i.e. risks not shown in the risk register).
- to manage unidentified risks (i.e. risks that cannot be identified through the risk management processes)
- the amount is based on the organization policies and/or complexity of the project (usually “guessed”(not scientifically) at 5 – 15% of the total budget)
- the management reserve is controlled by a representative from senior management (NOT the project manager), prior approval must be sought before utilizing the reserve on the project
- management reserve is NOT included in the cost baseline but in the project overall budget (Project Budget = Cost Baseline + Management Reserve)
- the management reserve would be kept until the end of the project
- NOTE: in reality, management reserve is seldom set aside in real world projects as many consider the organization would provide extra funding upon project managers’ requests should circumstances require anyway; however, this is NOT PMP® Exam’s way of doing project management
To illustrate the difference between Contingency Reserve vs Management Reserve, we will look at the events that require the use of each:
- You are a project manager for a critical building project in an earthquake prone zone. A minor earthquake happened yesterday that had destroyed some of the machinery. You, as the project manager, would immediately make use of the Contingency Reserve to repair / replace the broken machinery in order to move the project forward. — Since earthquakes are considered a risk (threat) to the project (know unknown), funding has already set aside as contingency reserve in preparation for such risks.
- Later in the project, the site the project was working on was struck by a tiny asteroid at night that resulted in the destruction of the building foundation. You, as the project manager, immediately reported the event to the senior management which authorized the use of Management Reserve immediately to clear the area and rebuild the foundation. — Since asteroid strike is NOT considered a risk that is possible enough to enter into the risk register.