This Guest paper was submitted for publication and is copyright to Roger L. Parish, PMP, © 2013.
published here July 2013.
It is an update to the paper, "PMBOK® Guide Fourth Edition - Unraveling Project Reserves", published by the author in March 2010.

Introduction | A Brief Description of Cost Management as Described in the Guide 3rd Edition
Contingency Reserves, 3rd Edition | Management Reserves, 3rd Edition
Cost Management PMBOK® Guide 5th Edition | The Problem with Changes in Scope
The Project Manager's Challenge | PART 2

Management Reserves, 3rd Edition

Over and above contingency reserves, which are included in the project's budget at completion (BAC) (as used in earned value calculations), is the concept of a management reserve. This reserve is to cover unknown unknowns.

In the Guide's 3rd Edition, unknown unknowns can most easily be thought of as scope[7] or quality changes. The need for this work is not in view when the project commences, but becomes apparent as work progresses. The monies needed to fund these scope or quality changes are obtained by submitting a change request. The approved change request results in adjustments to the baseline, both in terms of time, and the allocation or loading of additional funds into the cost baseline. This affects the budget at completion (BAC) and planned value (PV) baseline or Performance Management Baseline (PMB), which is used for earned value calculations. Thus, when a change request is approved, the BAC and PMB must be updated.

Another use of the management reserve is to cover realized risks. According to the 3rd Edition, these are risks that have been identified in the risk register, and have now actually occurred and negatively impact the project's budget. Management reserves can be released to cover these events.

The 3rd Edition, does not address realized risks that are not in the risk register. For example, the project may be occurring in a location where an earthquake is viewed as so unlikely to occur that it is not addressed in the risk register. Yet if the earthquake occurs, monies may have to be found to overcome the negative impacts. This actually occurred on a project in Seattle where a building collapsed as a result of an earthquake, destroying the technical library that supported the project. As a natural way of addressing such an event, the first place one would look for funds would be the management reserve, although this is not specifically addressed in this version of the Guide.

Management reserves do not generally include a "time bank", but only monetary resources. Thus, if an engineering change request will effectively increase the scope of the project, and also impact the schedule and expected delivery date, it will normally be addressed directly by the project sponsor and/or customer. In this case, there is no "time bank" per sť, but a renegotiated date for completing the project.

According to the 3rd Edition, the project manager must gain approval to spend management reserve funds. In the time dimension, the customer and/or sponsor would certainly have to agree to add more time, thus extending the deadline for completing the project. While less obvious (and not addressed in the Guide), changes that might result in earlier project completion may also create problems and therefore need to be negotiated with the stakeholders involved.

Contingency Reserves, 3rd Edition  Contingency Reserves, 3rd Edition

7. As is discussed later in this paper, the Guide's 5th Edition does not allow management reserves to be used for scope changes.
 
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