This Guest paper was submitted for publication and is copyright to Roger L. Parish, PMP, © 2009
published March 2010

Introduction | Cost Management as Described in the Guide 3rd Edition 
Management Reserves | Cost Management as Described in the Guide 4th Edition 
Vocabulary - An Alphabet Soup | The Project Manager's Challenge
A Recommended Solution | Project Performance (Earned Value) Reporting | Conclusion

Management Reserves

Over and above contingency reserves, which are included in the project's budget at completion (BAC) (as used in earned value calculations), the 3rd Edition adds a management reserve. This reserve is to cover unknown unknowns. The project budget includes the management reserve.

Unknown unknowns can most easily be thought of as scope 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 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, which is used for earned value calculations. Thus, when a change request is approved, the BAC and PV baseline 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 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 likely look for funds would be the management reserve, although this is not specifically addressed in this version of the Guide.

Of note is that in the 3rd edition of PMBOK®, three terms appear. These are: contingency reserve, management contingency reserve, and management reserve. The latter two terms, management contingency reserve and management reserve, are synonymous. The fact that the word "contingency" appears in "management contingency reserve" should not confuse the reader into thinking that this has anything to do with the contingency reserve described in the section above. It does not.

Management reserves do not generally include a "time bank" but only monetary resources. Thus, if an engineering change request that effectively increases the scope of the project and hence will also impact the schedule and expected delivery date, this is normally 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.

Cost Management as Described in the Guide 3rd Edition  Cost Management as Described in the Guide 3rd Edition

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