Okay, GTIM Nation whippersnappers, listen up. Back when I was first learning the ropes of PM there was a simple elegance about the way the types of budget were established and managed. Once the proposal was won and the negotiations settled, the customer would fund the Contract Budget Base, or CBB (this is now often referred to as Total Project Cost). The CBB was everything – the actual budget, contingency, fee – like I said, everything (but not Over Target Baselines, nor Authorized, Unpriced Work[i]). This figure would then be broken out into its components:
- Unless the contract type was Firm Fixed Price (FFP), the award fee/fixed fee would be set aside.
- If the customer was funding the Contingency Budget, this was usually not included in the CBB; however, if the contractor was expected to fund the Contingency, it was part of the CBB, and had to be set aside. And, just for the record, Contingency was defined simply as “in-scope, uncosted.”
- If parts of the project’s scope were too difficult to quantify precisely enough to generate a detailed cost estimate, a rough order-of-magnitude (ROM) estimate would establish the amount set aside for Undistributed Budget (UB).
- The remainder was available for funding the actual work. This remainder was divided among the project’s Work Packages, which were then rolled up into Control Accounts, and ultimately formed the project’s Performance Measurement Baseline (PMB).
The more seasoned members of Game Theory In Management Nation are probably asking themselves “Hey! What about Management Reserve?” What about it, indeed? For on this very point many a project has met an inglorious end.
Alas, The End Of A PM Era…
In the era I’m talking about, the Management Reserve was established by going to each of the Work Package managers after they had submitted their “final” cost estimates, and asking/telling them to give back a certain percentage (usually around 5%) of their budgets to create the MR. This ask was usually expressed with the acknowledgement that, yes, the WP managers had only agreed to achieve the scope based on receiving their full budget request and, if they needed the 5% back towards the end of their task, no worries. If, however, they could actually attain their scope with a 5% savings, then that amount would become available to other, poorer-performing WP managers, and the overall project would gain a certain level of PM latitude going forward. This intra-project philanthropy functioned very much like society-wide philanthropy, in that it made everyone’s life a bit better. In addition, the use and management of MR was completely invisible to the outside customer, since their reserves had already been established, and this set-aside was explicitly from inside the PMB. Like I said, it was a simple, elegant approach to managing projects, their budgets, and variances.
We Should Have Left Well Enough Alone
But then bad things started happening to the simple, elegant approach. Lots of customers began to view the reserves as some sort of slush fund, where disingenuous contractors could pull monies to cover events that those particular reserves were never intended to address, such as scope creep. I don’t know, maybe the PM community at large brought this upon themselves through a few instances of questionable practices on larger projects, or perhaps some customers became overly meddlesome, or some of both. In any event, the proper use of the reserves got catawampus, with some unfortunate manifestations, the one with perhaps the largest impact being, what happens to variances-at-completion for the tasks at the reporting level of the Work Breakdown Structure?
The way it’s supposed to work is that, when a given Work Package was getting ready to underrun, they could simply notify the PM that they wouldn’t need their MR allocation back, and might even be in a position to push more into the account. Likewise, if a given WP looked like it was going to overrun, and the reason had nothing to do with customer-induced scope creep or a genuine contingency event, they could appeal to the PM for some of the Management Reserve. As long as the underruns/overruns came out roughly equal, all was well.
But when the definition and terms of usage of the reserve accounts were upended, that simple, elegant technique was thrown out. Rather than establish Contingency as a reserve for in-scope, uncosted work, and Management Reserve as a purely internal-to-the-PMB account, these two were redefined based on who funded them. When that happened, it suddenly became legitimate to pressure the PM to give back any underrun that the activities on the reporting level of the Work Breakdown Structure (WBS) had saved, but the overruns – well, the contractor was expected to absorb those, of course. The intra-project philanthropy device was exiled, making everyone’s project a bit more scrutinized.
Of course, being the curmudgeon that I am, I think the best remedy would be to go back to the way it was done previously, but the realist in me realizes that’s never gonna happen. Maybe all that’s needed is a movement by the PM community towards an intelligent philanthropy element, starting with the definition of the term Management Reserve.
[i] See https://www.dau.mil/acquipedia/Pages/ArticleDetails.aspx?aid=cbb58d51-c988-4f97-b5a1-b1c59c076887 for an excellent article on these terms.