What Do You Have in Reserve?

Andy Jordan is President of Roffensian Consulting S.A., a Roatan, Honduras-based management consulting firm with a comprehensive project management practice. Andy always appreciates feedback and discussion on the issues raised in his articles and can be reached at [email protected]. Andy's new book Risk Management for Project Driven Organizations is now available.

  Risk Management   ProjectsAtWork  

Management reserves address the fact that not all project risks can be identified up front — the “unknown unknowns.” Many organizations fail to recognize the need for these reserves, and many more set them arbitrarily. But ignoring the importance of reserves is a risk in itself, and guessing how much to allocate for them is just bad management.

In “What’s Your Risk Profile?” (Dec. 16, 2013), I introduced the idea of the organizational risk profile and explained a number of the different elements within it. Now I want to address the importance reserves.

In project management we tend to think about contingency reserves as being calculated based on some logical formula and management reserves requiring a little more interpretation. I’m going to focus on management reserves here, but a brief discussion on contingency reserves is required initially.

Generally accepted approaches say that the contingency reserve is under the control of the project manager and is designed to deal with ‘known unknowns’ — those risks that have been identified and assessed. Typically it is calculated based on the sum of the impact of each risk multiplied by the percentage chance of occurring of each risk. I’m fine with that definition, and it should result in two totals: one for the dollar impact and one for the schedule impact. However, I would…

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