“The desire for safety stands against every great and noble enterprise.” Tacitus
“I'm not interested in wasting money on a project.” Stanley Tucci
And there is the rub!
In a predictive project, there is an expectation that the Project Manager (PM) will deliver something new and different while being able to exactly predict the cost and time required. The PM spends a great deal of time planning every aspect of the project, removing uncertainty, and developing a comprehensive Risk Management Plan. Risks are identified, catalogued and assessed. Subject matter experts provide their input and the appropriate response strategies are put in place.
But things still happened! That is the nature of risk.
So how does the PM deal with a risk that has occurred or is about to? They have planned response strategies, but those strategies usually involve changes to the Project Plan. Which means the work of the project. Which means it will impact either cost or schedule.
But those have been agreed to and “baselined”, meaning that changes need to be approved through the designated governance process. Are we really going to go through formal governance every time a minor risk occurs that impacts the cost or schedule?
The answer is no. It is addressed through reserve!
Reserve is a simple concept that is difficult for many organizations to do well. It is a provision in the Project Plan that allows the PM to adjust cost or schedule as necessary (within the limits designated in the Plan) for risk related activities. There are two broad categories of risk that reserve can be used for: known and unknown. The PM should be provided with enough reserve to account for known risks. This is called Contingency Reserve and is usually allocated for risks that were accepted or where contingent or mitigation responses were developed. A known risk that was avoided would already be “built” into the plan.
So how much reserve is needed? Determining the amount is done through a variety of reserve analysis techniques. For example, you can take the sum of the Expected Monetary Value of the risks as determined through Quantitative Risk Analysis, you can look at comparable completed projects, or you could just have a corporate policy that reserve is “x” percent. There are many right ways to do this, but it should be done.
This also applies to the project schedule, and many of the estimation techniques used for cost can be used. Money is money, but how should the PM account for reserve in the schedule? One technique is to add “buffers” (non-work schedule activities) in the schedule itself at critical points or periodically through the lifecycle of the project. Another method is to add time to the end of the project. Your schedule shows a 10-month duration, so you add 2 weeks reserve at the end of the project.
This is not padding. Padding is adding time or cost without transparency, and in my opinion is unethical. You estimate an activity is going to take 2 weeks and cost $5000, so you “pad” it and put the official estimate at 2 ½ weeks and $5500. If all the experts do that, you have grossly inflated both the cost and the schedule with no transparency. Then you add reserve on top of an already inflated schedule and budget? In projects, transparency is everything.
The PMBOK® says that the budget and schedule, inclusive of contingency reserve, becomes part of the Project Baseline. That is what the PM is responsible for delivering. The implication is that the PM can adjust the schedule and cost within the defined parameters of the Risk Management Plan without approval. How many of you do that? I have taught Project Management to hundreds of students, and when I ask this question the answer is almost universally: “The PM doesn’t control the reserve. If they need more time or money, they have to ask for it.” But why? I have my thoughts on the subject, but that is for another time.
There is another category of reserve.
Management Reserve is the money held for unforeseen work and is specifically used for unknown risks. The PM is not responsible for this money until the additional work funded by it is added to the project scope. Spending management reserve is not always an indication of a problem, rather it can signal something positive! Picture a project with deferred requirements that was ahead of schedule. Because (in this hypothetical) there is no benefit in finishing early, management may decide to add deferred requirements to the scope. This will provide additional business value by the same delivery date! The PM accepts the additional scope and updates the Project Baseline.
You may say “how is that risk”? For the PM risk presents as variance to the Project Plan, so management adding additional work would fall under the category of "risk" because it is an unexpected change to the plan.
For those of you who sleep with the PMBOK® under your pillow, I know my definition here is slightly different than the “book” answer. The PMBOK® says management reserve is for unforeseen work that is within the scope of the project. The scope of the project is partially defined by the Work Breakdown Structure, so I believe a better definition is that Management Reserve is for work that falls within the bounds of the Project Charter.
The PM should have control of and be accountable for the cost, scope and schedule baseline. The baselines should contain Contingency Reserve so the PM can efficiently and effectively manage known risk. Management Reserve is for unknown risk.
Coda
When I teach Project Management Professional® test preparation classes, I am very careful to make sure that I am precise in my definitions of Project Management terms of art. That is what is tested. For over a decade I have also been the responsible executive for many high risk, high profile projects. Many of these were international in nature and exposed me to several different governance models including ISO, IEC, IEEE and PRINCE2. My experiences, both good and bad, have shaped my view on what Project, Program and Portfolio best practices are. I love this type of work and thought it would be fun to share some of my experiences with my colleagues, and that is what these posts are. But don't read this and then take the test! You may miss a couple of questions...