Project Contingency Reserve

Too many words here...sigh...

Short answer; “As soon as planned and/or reasonable” within the project life-cycle.

For me, ‘give-back timing’ is under-pinned by well-structured financial & risk management plans developed with consideration to the nature of the work (project type – understanding of inherent risks) and experience associated to the environment your operating within (institutional knowledge, operational awareness, etc. – not always the case). Decisions are then based on the plan, events as they trigger (or not) and via an iterative and disciplined Risk Management assessment cadence which our function performs in-concert with our Finance SMEs.

Like most, philosophically and in practice I do not want a finite resource [people, budget, time] committed to a reserve anywhere in a company when it may be better turned into “real spend” elsewhere supporting the businesses strategic priorities. If I cannot use or effectively manage a given reserve, I want that Capital or Expense ($USD in my case) re-allocated, then spent where it will be most effective at the most opportune time.”

Once reserve is allocated some orgs and personalities have the compulsion to “isolate it, put up a harsh barrier to protect it and fight to retain it to the bitter-end until they’re safe and 100% in the clear.” A host of reasons for that behavior, some legit some not but…don’t be one of those people. :)

I’m fortunate in that within my function our folks “get this” to the nth degree. Up-n-down the stack (roles) we crisply and intelligently balance risk reserve to ensure those funds are used as intended, when intended, or we give it up for the greater good as early as practical in our fiscal year. This is ingrained in our DNA (culture) and exhibited in our behaviors, our processes, our governance and frankly, PMs have ‘fun’ at times being both highly-proficient and efficient at it.

Some general examples;

- At trigger, reserve is spent as committed in full or partial and partial is reassessed (pure milestone ‘use-reallocate-return’)

- At trigger, reserve not spent is reassessed for retention and/or reallocation within the project budget or elsewhere in the sub-portfolio/portfolio (with rationalization). If no reasonable retention is determined monies are returned to Management Reserve (Finance in my case)

- At trigger reserve is not spent, uncertainty & complexity lies ahead because of the nature of the work or the environment, rationale to retain is not simple to define etc., protect the project first and let it “sit” in reserve until a determination can best be made. But…with no decision, ensure controls are wrapped-around it and don’t let it languish or be used as an escape hatch to compensate for poor financial/risk management practices.

- Via monthly cadence at the component, sub-portfolio and portfolio-level, risk and associated reserve is reviewed and our pros “adjust and tune” via good decisions (and sometime we make mistakes with good intent) to ensure component/portfolio health is preserved.

- Lastly, when the good ol’ known-unknowns and unknown-unknowns bite, allow common-sense and reason to prevail, fund it (or not and manage the impact accordingly), reset financials then rinse and repeat risk management through Finish.

Caveat: Like most, I’ve been in plenty of environments where the rigor isn’t there. Where poor decisions or no decisions are the order of the day, or where a party mandated I “keep it through Finish” or “just give it back.” At times you just have to lock-down and carry, other times an entity swoops in and yanks it out from underneath you without cause. With reserve, you make your best choices every day, week, month, quarter, year.

Thanks Wade. Is there any reason you prefer hanging on those reserves ? Does it bring value to the project ?

No, I'm just a selfish hoarder.

If there's a resource approved for my project, I'm not quick to voluntarily release it if it's something I might still use. If that contingency reserve is money tied to an identified risk, for example, and that known-unknown is now resolved, I'd still like to keep that reserve as a sort of in-pocket management reserve. Never mind that the organization can use that resource on another project; that project isn't mine, so I don't care.

By contrast, if it's a large piece of equipment that I now know I won't need, I can't wait to get rid of it!

Please don't mistake this as a post about what I "should" do, I'm only confessing what I "want" to do. I'll accept a light verbal flogging from any PM who has never had similar temptations.

In reality, I'm always going to be honest about my project progress, risks, needs, and wants. I might ask to keep a resource if there's a legitimate reason, but I would never try to conceal information from my organization. They need that information so they can manage those resources at a higher strategic level.

I got where you are going with this and thanks for your honest opinion. I just have one comment:

Being part of an organization then if the organization would use that money on another project then why won't you care ? You should be happy that your project supports other projects rather than being the project that requires support.

You are exactly correct, and that is why I need to occasionally look up from my own project and appreciate the more strategic view of my organization. Sometimes, I need others to remind me that there's more to our business than my project.

You should start reducing the contingencies amount starting from execution and depending on the confidence level you would like to keep on the project.
Contingencies should be split between CR (Contingency Reserve) and MR (Management Reserve). The first one is based on specific risks (risks known-unknowns) that could be identified, so every time one risk ceases the possibly to happen, a quote of CR must be released.
MR covers risks that cannot be identified (risks unknown-unknowns) so you keep it as long as you feel confident to release it because you are not expecting new risks to arise.
Hope this explanation might help.

I only start reducing contingency when there are only a few risks left that have monetary impact. Otherwise releasing contingency too early can be risky.

I only start reducing contingency when there are only a few risks left that have monetary impact. Otherwise releasing contingency too early can be risky.