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Topics: Earned Value Management, PMI Standards, Risk Management
Management Reserve
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From your experience, in which cases were or will you be obliged to use Management Reserves in a Project ?
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Based on theory, management reserve is used for "unknown unknown".
As long as you can classify the unexpected event/risk as "unknown unknown" the management reserve can be consumed subject to approval from appropriate stakeholders/committee.
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2 replies by Rami Kaibni and Steven Zachary
Dec 31, 2015 3:05 AM
Rami Kaibni
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Thanks Balaji. I am totally aware of this, I am looking at examples from your experience, has it ever happened in one of your projects ? If yes, what was the unknown risk ?
Dec 31, 2015 12:40 PM
Steven Zachary
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Balaji. You are correct. This is exactly what management reserve is. And you've also defined the exact reason management reserve is a terrible concept.
Network:103134



Dec 31, 2015 2:21 AM
Replying to Ganesan Balaji PMP, RMP, PgMP
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Based on theory, management reserve is used for "unknown unknown".
As long as you can classify the unexpected event/risk as "unknown unknown" the management reserve can be consumed subject to approval from appropriate stakeholders/committee.
Thanks Balaji. I am totally aware of this, I am looking at examples from your experience, has it ever happened in one of your projects ? If yes, what was the unknown risk ?
...
1 reply by Steven Zachary
Dec 31, 2015 12:40 PM
Steven Zachary
...
Such a good question Rami. I've never seen it used....PROPERLY. I get the theory behind it. I've seen it used to cover poor planning and it's always always used improperly in my humble experience.
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In a project I led, the sponsor and steering committee allowed a 10% management reserve for the unknown risks. Unfortunately, we needed to use up this 10% (and more) given that there was a mistake during the requirements collect process, which directly impacted the cost of a high tech assembly machine.

Have a Great New Year 2016!
...
2 replies by Rami Kaibni and Steven Zachary
Dec 31, 2015 11:52 AM
Rami Kaibni
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Great Input Eduard, thanks a lot. Can you be more specific about the type of unknown risk which occured and forced you to use the MGT Reserve ?
Dec 31, 2015 12:43 PM
Steven Zachary
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Eduard. As a career business analyst it sometimes gets to me when every cost overrun is blamed on "poor requirements". Although I agree poor requirements can and do increase costs, other factors like poor planning, weak execution, incorrect project team, scope creep and on and on can affect costs.

This is the reason management reserves are such a cop out. Think about this logically. You are using something called "management reserve" to cover unknown-unknowns. Yet business analyst discover those same unknown-unknowns and...I don't see a "requirements reserve".
Network:103134



Dec 31, 2015 7:38 AM
Replying to Eduard Hernandez
...
In a project I led, the sponsor and steering committee allowed a 10% management reserve for the unknown risks. Unfortunately, we needed to use up this 10% (and more) given that there was a mistake during the requirements collect process, which directly impacted the cost of a high tech assembly machine.

Have a Great New Year 2016!
Great Input Eduard, thanks a lot. Can you be more specific about the type of unknown risk which occured and forced you to use the MGT Reserve ?
...
1 reply by Eduard Hernandez
Dec 31, 2015 1:38 PM
Eduard Hernandez
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Hi Rami.

The team pull together a URS (User Requirement Specification) for a high speed assembly line, according to the customer's product specification. The product was a plastic dispenser, with a membrane on the tip of the nozzle. The specifications failed to mention that the membrane needed to be cut on a certain manner in order to provide functionality. Adding this feature to the machinery added cost and time - the money needed came out of management reserve.

This is what I meant by poor requirements collection - based on the information provided by the customer, a slit on the membrane was not needed.
Network:399



Will use a MR if it is necessary to redo a task including unanticipated redesign, remake, or retest. Also the usage of MR is relevant if we make a change within the Make or Buy decisions which could either result in an increase or decrease of the reserve value. Another usage is where we transfer a risk from one organization to another, which results in transfer of the SOW

To use the MR in the above cases it would be essential that the risk register would have identified the potential risks. Moreover there is no reluctance from the management to use the MR for the realized risk.
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2 replies by Rami Kaibni and Steven Zachary
Dec 31, 2015 12:44 PM
Steven Zachary
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Kiran,

If that happens in your organization I applaud you. That is how management reserves should be used. Great work!!!
Dec 31, 2015 1:23 PM
Rami Kaibni
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Thanks for your Great input Kiran. I agree with you except for two point:

Re-Do, Re-Test, Re-Design ... Those come from lack of planning and monitoring or missing scope definition so they become unknown-unknown Risks - This should not happen in projects.

Moreover, of potential risks are identified then they do not fall under unknown-unknowns and the MR does not cover them. They are instead covered under Contingency Reserve.

I would like to have your input on the above.
Network:8275



Dec 31, 2015 2:21 AM
Replying to Ganesan Balaji PMP, RMP, PgMP
...
Based on theory, management reserve is used for "unknown unknown".
As long as you can classify the unexpected event/risk as "unknown unknown" the management reserve can be consumed subject to approval from appropriate stakeholders/committee.
Balaji. You are correct. This is exactly what management reserve is. And you've also defined the exact reason management reserve is a terrible concept.
Network:8275



Dec 31, 2015 3:05 AM
Replying to Rami Kaibni
...
Thanks Balaji. I am totally aware of this, I am looking at examples from your experience, has it ever happened in one of your projects ? If yes, what was the unknown risk ?
Such a good question Rami. I've never seen it used....PROPERLY. I get the theory behind it. I've seen it used to cover poor planning and it's always always used improperly in my humble experience.
...
1 reply by Rami Kaibni
Dec 31, 2015 1:24 PM
Rami Kaibni
...
Exactly, this is why I rasied the question. I need to get some practical feedback and exmaples.
Network:8275



Dec 31, 2015 7:38 AM
Replying to Eduard Hernandez
...
In a project I led, the sponsor and steering committee allowed a 10% management reserve for the unknown risks. Unfortunately, we needed to use up this 10% (and more) given that there was a mistake during the requirements collect process, which directly impacted the cost of a high tech assembly machine.

Have a Great New Year 2016!
Eduard. As a career business analyst it sometimes gets to me when every cost overrun is blamed on "poor requirements". Although I agree poor requirements can and do increase costs, other factors like poor planning, weak execution, incorrect project team, scope creep and on and on can affect costs.

This is the reason management reserves are such a cop out. Think about this logically. You are using something called "management reserve" to cover unknown-unknowns. Yet business analyst discover those same unknown-unknowns and...I don't see a "requirements reserve".
Network:8275



Dec 31, 2015 12:09 PM
Replying to Kiran Kumar
...
Will use a MR if it is necessary to redo a task including unanticipated redesign, remake, or retest. Also the usage of MR is relevant if we make a change within the Make or Buy decisions which could either result in an increase or decrease of the reserve value. Another usage is where we transfer a risk from one organization to another, which results in transfer of the SOW

To use the MR in the above cases it would be essential that the risk register would have identified the potential risks. Moreover there is no reluctance from the management to use the MR for the realized risk.
Kiran,

If that happens in your organization I applaud you. That is how management reserves should be used. Great work!!!
...
1 reply by Rami Kaibni
Dec 31, 2015 1:24 PM
Rami Kaibni
...
I do not fully agree with this. Please check my comments above and would appreciate your opinion.
Network:103134



Dec 31, 2015 12:09 PM
Replying to Kiran Kumar
...
Will use a MR if it is necessary to redo a task including unanticipated redesign, remake, or retest. Also the usage of MR is relevant if we make a change within the Make or Buy decisions which could either result in an increase or decrease of the reserve value. Another usage is where we transfer a risk from one organization to another, which results in transfer of the SOW

To use the MR in the above cases it would be essential that the risk register would have identified the potential risks. Moreover there is no reluctance from the management to use the MR for the realized risk.
Thanks for your Great input Kiran. I agree with you except for two point:

Re-Do, Re-Test, Re-Design ... Those come from lack of planning and monitoring or missing scope definition so they become unknown-unknown Risks - This should not happen in projects.

Moreover, of potential risks are identified then they do not fall under unknown-unknowns and the MR does not cover them. They are instead covered under Contingency Reserve.

I would like to have your input on the above.
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