My Experience of Selecting right option in PMP EXAM using 5 Simple Steps

 

 

Contingency Vs Management Reserve

If you find Contingency vs Management Reserve confusing during exams, you’re not alone. Let’s simplify this tricky topic with real-life finance examples so it finally makes sense.   

Even in our personal life we have our own ways of handling finances and they are close to project management methods.

For instance, apart from our daily expense we still have a buffer amount (cash in hand or bank savings) which is equivalent to contingency reserve. we can still use this for vehicle maintenance, festival expenses and minor emergencies.

In spite of having this buffer amount, we still go for insurance for unknown medical expenses which is equivalent to a management reserve.

If you need to use buffer amount it will be in your control which is similar to Contingency Reserve.

If you need to use the amount for unforeseen expenses from insurance you have to follow a process and is controlled by different team which is equivalent to Management Reserve.

Whatever the expenses we have to manage all comes under our total budget based on our income.

Similarly, any project will have a Total budget and a project manager has to manage the expenses of the budget with the allocated budget for the project.

Now let us dive into the nuances of the budget in Project Management.

As you can see in the below image Total Project Budget has Cost Baseline (which includes contingency Reserve + Work package cost) and Management Reserve.

       Total Project Budget 

                                                         

Most of the PMP aspirants will be confused here, especially when to use contingency reserve and management reserve.

You can think as Contingency reserve is used for Identified risk or documented risk. However, Management reserve is used for unidentified risk or unrecorded risk.

Let us look into each reserve based on PMI principles.

Contingency Reserve ℹ️

 ✅ Controlled by Project Manager can be used without any approval.

 ✅ Used for Identified risks (which is available in risk register)

 ✅ Contingency Reserve is part of cost baseline - which means work package cost plus contingency reserve together is called as cost baseline.

Example – A component delivery by a vendor is delayed and in this scenario project manager will check the risk register as this will be identified as risk and recorded with appropriate responses.

Management Reserve ⚠️

✅ Controlled by Management and need approval to use it.

✅ Used for unidentified risks but within the scope of the project.

✅ Management reserve is not part of cost baseline but still it is part of overall project budget.

 Example – A project manager will get an update from regulatory board which has the impact on the data security. This unplanned change in Law which is unexpected but still is within the scope. This is a situation where project manager has to make changes which was not identified during risk analysis. This change needs cost and how to decide on which reserve to be used?

First option - Contingency Reserve - Since the risk was not identified during risk analysis, project manager cannot use contingency reserve.

Second Option- Management Reserve - This will not be recorded in risk register as this was unexpected, this becomes unknown unknowns or unidentified risk and in such case project manager can go for management reserve with formal approval process.

In Conclusion, Contingency is controlled by Project manager and used for Identified risk. Management Reserve is controlled by Management for unidentified Risk. Both Reserves are used for the project changes within the scope.

So the next time you’re stuck on a PMP question about reserves, just think of your own finances—your emergency cash is Contingency, your insurance is Management. Simple, right?