Management Reserve and Contingency Reserve are two widely used reserves in Project Management, Program Management. It can also be used in Portfolio Management and Agile Management, though the way there are used will be somewhat different. However, there are many misconceptions about these two reserves. In this article we will see what those myths are and check upon the facts.
These explained in my courses such as:
- PMP Live Lessons, Guaranteed Pass or Your Full Money Back
- ACP Live Lessons, Guaranteed Pass or Your Full Money Back
- RMP Live Lessons, Guaranteed Pass or Your Full Money Back
Note: First go through the myths on your own and try to answer yourself. That way you will get a better value from this article.
Hope you are tried to do the exercise on your own first! I'll also suggest that you go through this article to learn more:
Article - Contingency Reserve and Management Reserve
Now, let's see the myths and facts.
Myth – 1: Addition of contingency reserve to activity cost estimates (or activity duration estimates) will create a rubber baseline.
Fact: Contingency reserve can be at the activity level or work package level etc. If it’s at the activity level, then it need not be at the work package level. The reserves from lower level estimates will get rolled up to the work package level. Hence, there is no chance of having a rubber baseline.
As you can see in the above block representation, the contingency reserve can be at the activity level, or work package level. Otherwise, you can have an overall contingency reserve at the project level.
Myth – 2: Contingency reserve is not applicable for the project schedule, it’s only for the budget.
Fact: It’s applicable for both project schedule and project budget. You can have contingency reserve calculation while determining the duration estimates of tasks or cost estimates of tasks.
Refer to the previous diagram to see overall contingency reserve.
Myth – 3: Any reserve can be tracked with a reserve burndown chart.
Fact: Usually, contingency reserve is tracked at the project level, but management reserve is not. The reason is simple. Project Managers know and manage the contingency reserve as it’s part of the performance measurement baseline.
So, the reserve burndown chart that one creates and manages at a project level is with respect to the contingency reserve, not for management reserve.
Myth – 4: If the reserve is unused, then it can be part of project profit!
Fact: This is another big myth propounded. But you can’t take the unused reserve as part of the profit. It’s meaningless because you have added the reserve for unforeseen circumstances.
- Threats – if the reserve is unused then, it has to be removed or given back.
- Opportunities – if the reserve increases because you exploited the opportunity, then yes, for this you can consider it to be a profit.
Re-read the previous line! In risk management, both threats and opportunities are considered, but the way they are treated will be different.
Myth – 5: Reserves have little to no role to play in S-curve interpretation.
Fact: In fact, it’s the other way around. You should be worried when the reserve starts getting depleted while doing your S-curve analysis. The Budget at Completion (BAC) in earned value calculation should include the contingency reserve (CR).
Sometimes the estimate at completion (EAC) can go beyond the available contingency reserve and may eat-up the management reserve (MR).
As shown in the above S-curve, the trend for Actual Cost (AC) curve is upward and it may consume not only the contingency reserve, but also the management reserve for the project.
Myth – 6: Slack or float can be a replacement for contingency reserve.
Fact: Slack and reserve are two completely different concepts. Many confuse the two.
Total slack is about how much time you can delay a task without delaying the project end date. Free slack, simply put, is how much you can delay a task without delaying any successor task.
Reserve or allowance on the other hand protects you against the delay in the current activity, not next activity’s start date!
Myth – 7: Contingency reserve and contingency response planning are one and the same thing.
Fact: Contingency as we know is the reserve for known risks, but unknown amount of rework. It’s for risks which are accepted or known risks with active risk response strategies.
Contingency planning, on the other hand, consists of two plans: Contingency Plan and Fallback Plan. Simply put, these two plans are Plan A and Plan B, respectively that we use in our day-to-day risk management.
Myth – 8: Agile projects don’t have all these reserves available.
Fact: In Agile projects, too, you may require contingency and management reserves. Consider an Agile project with mandatory regulatory requirements and one of the needs to meet the budgetary regulations with earned value calculations. In such a case, you need to have the reserves.
Myth – 9: Management Reserve is a budget category, and not applicable for Schedules.
Fact: This is another myth, which is widely circulated. While management reserve is usually a budget category, you can also have it for schedule. In fact, the definition of Management Reserve as per the PMI-PMBOK guide is this:
An amount of the project budget or project schedule held outside of the performance measurement baseline for management control purposes that is reserved for unforeseen work that is within the project scope.
Can you see that the management reserve can also be part of project schedule (not just budget)?
Myth – 10: Contingency Reserve and Contingency are one and the same thing.
Fact: Contingency is an event or occurrence that could affect something, e.g., a task, a work package or the execution of the project. Contingency reserve, on the other hand, is the time or money allocated for known-unknown risks. However, contingencies can be accounted for with reserves.
There are many other myths, which circulate on these two reserves. What are the other myths you think are not correct for contingency reserve and management reserve?
If you have any questions, suggestions or feedback, do share your comments in the comment section of this article.
References:
1. PMP Live Lessons, Guaranteed Pass or Your Full Money Back, by Satya Narayan Dash
2. ACP Live Lessons, Guaranteed Pass or Your Full Money Back, by Satya Narayan Dash
3. RMP Live Lessons, Guaranteed Pass or Your Full Money Back, by Satya Narayan Dash
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