Contingency Reserve and Management Reserve are different kinds of reserves that serve the same purpose: managing the risks; therefore, a lot of professionals mix up these two different concepts. From my personal experience, I can say that more than 50% of project professionals (not the PMPs) I met were not aware of the correct meaning of it. They understand it as 5% or 10% of the cost or time of the project. They think that Contingency Reserve and Management Reserve is same thing; though, they are not the same.
Anyway, let’s discuss them one by one.
Contingency Reserves: Contingency Reserve is the cost or time reserve that is used to manage the identified risks or “known-unknowns” (known=identified, unknowns=risks). Contingency Reserve is not a random reserve, it is a properly estimated reserve based on the Expected Monitory Value (EMV), or the Decision Tree Method.
Contingency Reserve is controlled by the project manager. He has authority to use it when any identified risk occurs, or he can delegate this authority to the risk owner, who will use it at an appropriate time and informs the project manager at a later stage.
Management Reserve: Management Reserve is the cost or time reserve that is used to manage unidentified risks or “unknown-unknowns” (unknown=unknown, unknowns=risks). Management Reserve is not an estimated reserve; it is defined as per the organization’s policy. For some organizations, it is 5% of the total cost or time of the project, and for others it is 10%.
Management Reserve is controlled by someone outside the project team, usually from the management. Every time an unidentified risk occurs, the project manager has to get approval from the management to use this reserve.
Here the discussion about the contingency reserve and management reserve finishes, but before we leave let’s summarize all the key points once again:
- used to manage identified risks
- estimated based on Expected Monitory Value (EMV), or decision tree method
- project manager has authority to use this reserve
- used to manage unidentified risks
- calculated as a percentage of the cost, or time of project
- require management approval to use this reserve
This was all about Contingency and Management Reserve. Feel free to write in the comment box if you require any further clarification – I am ready to discuss it with you to reach a mutually agreed conclusion.
Please prepare for this topic well as you may see one or two questions from this topic in your PMP Test.