Contingency and management reserve
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This document discusses contingency and management reserve. It defines management reserve as a sum of money held as an overall contingency to cover unexpected costs, and distinguishes it from contingency reserve which is for identifiable risks. It provides guidelines for calculating contingency reserve based on expected monetary value of identified risks, and calculating management reserve as a percentage of project costs or time. The document emphasizes that management reserve requires management approval to use and should not be used for scope changes or planned opportunities. It includes diagrams showing how management reserve fits within the project budget and how it is managed when risks occur.
Contingency and management reserve
- 1. Gain the Advantage Measure the Risk Risk Advantage Limited Peter Campbell FAPM MIRM MBCS MIET Society for Risk Analysis Director: Risk Advantage Limited Chairman: APM Risk SIG Contingency and Management Reserve 1
- 2. Gain the Advantage Measure the Risk Risk Advantage Limited 2 • Why do we need Management Reserve. • How is it Defined. • How do we evaluate it. • How do we Manage it.. Agenda
- 3. Gain the Advantage Measure the Risk Risk Advantage Limited 3 Management Reserve: Why? • Projects usually have their targets set very early. • Estimates at this time may not be accurate. • Identified threats may not respond to mitigation action. • Emerging Threats.
- 4. Gain the Advantage Measure the Risk Risk Advantage Limited 4 Contingency or Management Reserve PRAM. Contingency: A margin of resource or specification in excess of the base estimate to enable the achievement of project objectives in the face of the impact of specific risk events. APM BoK. Management Reserve: A sum of money held as an overall contingency to cover the cost impact of some unexpected event. Contingence: Resource set aside for responding to identified risks. Interfacing Risk and EVM Guide. Specific Risk Provision to Manage identifiable and specific risk. Non-specific Risk Provision to manage emergent risks.
- 5. Gain the Advantage Measure the Risk Risk Advantage Limited 5 PMBOK Guide 4th Edition. Cost base line is the sum of project cost estimate and contingency reserve; i.e. Cost Baseline = Project Cost Estimate + Contingency Reserve Project budget is the sum of project cost base line and the management reserve; i.e. Project Budget = Cost Baseline + Management Reserve Therefore, Management Reserve is not a part of the cost baseline but it is a part of the project budget and Contingency Reserve is a part of cost baseline as well as project budget. Contingency or Management Reserve
- 6. Gain the Advantage Measure the Risk Risk Advantage Limited 6 Contingency or Management Reserve Contingency Contingency is the amount of money used in the estimate to deal with the uncertainties inherent in the estimating process. Contingency is required because estimating is not an exact science. Management Reserve An amount added to the Programme or Project budget to allow for specific risk threats that may, or may not, occur.
- 7. Gain the Advantage Measure the Risk Risk Advantage Limited 7 Contingency Reserve: Used to manage identified risks estimated based on Expected Monitory Value (EMV). Project manager has authority to use this reserve. Management Reserve: Used to manage unidentified risks calculated as a percentage of cost, or time of project. Project Manager requires management approval to use this reserve. Contingency or Management Reserve
- 8. Gain the Advantage Measure the Risk Risk Advantage Limited 8 Contingency or Management Reserve Scope: Management Reserve is not a source of funding to cover scope change. Opportunity: You don’t need a reserve for things that are planned to generate their own resource.
- 9. Gain the Advantage Measure the Risk © Risk Advantage Limited } Management Reserve Baseline Budget (Cost Baseline) Time Cost Specific Threat Reserve Threat Mitigation/Control Cost Non-Specific Threat Reserve Calculating the Budget 9 Project Budget
- 10. Gain the Advantage Measure the Risk Risk Advantage Limited 10 Calculating the Budget Baseline Budget Specific Reserve Non-Specific Reserve Emergent Threat Identified Threat Approved Budget (PMB)
- 11. Gain the Advantage Measure the Risk Risk Advantage Limited 11 Calculating the Budget
- 12. Gain the Advantage Measure the Risk Risk Advantage Limited 12 Managing the Reserve Identify Change. Change Management Risk Management Threat Occurs. Evaluate and Approve Change. Implement Change. Risk Draw-down. Issue Response .
- 13. Gain the Advantage Measure the Risk Risk Advantage Limited 13 £0 £2,000 £4,000 £6,000 £8,000 £10,000 £12,000 £14,000 £16,000 £18,000 £20,000 £22,000 £24,000 £26,000 £28,000 £30,000 £32,000 £34,000 £36,000 Minimum Maximum Budget Specific Risk Provision Exposure Risk appetite PMB Specific risk provision Non Specific provision Confidence Questions? peter.campbell@riskadvantage.co.uk