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Topics: Cost Management, Risk Management
contingency reserves included in the cost and time baseline
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Do you include contingency reserves for risks in the PMB (Performance Measurement Baseline)?

If these reserves are not included, the baseline will probably not be met, because in all projects at least some identified risks will occur.

But, including the reserves lead to two issues:
1) The EVM and specially the forecasts calculated from the EVM will not deliver correct results.
2) According to Parkinson’s law (“work expands so as to fill the time available for its completion”) the reserves will be used if risks will occur or not. This will result in an exceedance of the baseline, especially if risks occur at the end of the project.

Does it make sense to use the baseline without the reserves as a basis and increase the baseline with the reserves as soon as risks occur (similar to the handling of management reserves)?
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Point is: it has sense to use baselines? While it depends on the environment where you are working the use of baselines means that everything will happen as you planned. In the actual world is difficult to be in that situation.
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Ergo throw out performance baselines Sergio? lol. Meanwhile back on earth, I have certainly heard of that being done before Wilko, but I don't think it's good practice even if some organizations allow it. The issue is you need to nominate what the reserve is early, and more importantly why? It can't be made up as you go along when the risk occurs, as that would simply be rework, fixing, workarounds etc. While it is true nothing will go exactly according to plan, it will certainly go way off plan without a benchmark (baseline).
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1 reply by Sergio Luis Conte
Dec 27, 2017 6:08 AM
Sergio Luis Conte
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Baselines are not needed to meassure performance or any other type of thing you want to measure. Baselines becomes obsolete in the actual world. The same with other measures. As I mentioned it could depend on the environment. And I am no talking to do not keep all into an environment where we keep the past to control and understand the future. I am talking about to keep baselines (for example schedule baseline) is not useful today.
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Wilko - Please note that by definition, Contingency Reserves are for unknown risks which can happen anytime during the project. For known/documented risks, you would have a mitigation plan. If the documented risks materialize, then you should follow the mitigation plan

What we should do when an unknown/undocumented risk occurs is wide open to discussion/debate. The options are

1. You could change the project plan/staffing/timeline etc and present an updated cost/timeline to project sponsor and seek the approval
2. When you do an impact analysis of the undocumented risk and you find that this can be mitigated with some budget from the Contingency reserve, then you can choose to implement that. But in practice you should not consume entire contingency for a single occurrence. Further down the line of project, if a new risk occurs, then you would be left with no reserve

Contingency is a like a small purse given to PM to use in case of an emergency. Ideally PM should have authority to use only a %(say 25%) of the amnt in any given situation. If the situation demands more money, then you should seek approval from the sponsor.

It is a usual practice to exclude Contingency Reserve from the EVM calculations
Hope this clarifies your question

The Con
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1 reply by Francesca Schiezzari
Jan 05, 2018 5:24 AM
Francesca Schiezzari
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Contingency Reserve (CR) covers known-unknown, that means risks that can be define and are described inside a Risk Register.
Unknown-unknows, such as risks that you cannot define are covered inside the Management Reserve(MR)
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Dec 27, 2017 5:59 AM
Replying to Sante Vergini
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Ergo throw out performance baselines Sergio? lol. Meanwhile back on earth, I have certainly heard of that being done before Wilko, but I don't think it's good practice even if some organizations allow it. The issue is you need to nominate what the reserve is early, and more importantly why? It can't be made up as you go along when the risk occurs, as that would simply be rework, fixing, workarounds etc. While it is true nothing will go exactly according to plan, it will certainly go way off plan without a benchmark (baseline).
Baselines are not needed to meassure performance or any other type of thing you want to measure. Baselines becomes obsolete in the actual world. The same with other measures. As I mentioned it could depend on the environment. And I am no talking to do not keep all into an environment where we keep the past to control and understand the future. I am talking about to keep baselines (for example schedule baseline) is not useful today.
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Contingency reserves are components of the plan. If you maintain baselines on the plan, for example for items you mentioned, you have to included contingency reserves into baseline.But remember that contingency reserves are always budged. I am mentioned it just in case you are considering risk as part of your activity duration calculation because those are not contingency reserve.
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Wilko -

You need to keep contingency reserves separate from work package cost & time estimates, but include them in the baseline. That prevents individual team members from using them as padding as it is your responsibility as the PM to administer their usage.

From an EVM perspective this will make calculations a bit more challenging but if you have a good understanding of the time sequencing of your contingency utilization it can still be done.

Kiron
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Wilko

Contingency has to be managed independently of the base work for many reasons; some mentioned already and no need repeat.
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Sergio

If you do not use baselines or approved plans - then how would you measure performance? Assuming by the performance we mean actual versus plan. If we do not use baselines that what do we measure, just completion whenever that happen and at whatever cost?
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Sergio

Another question? In an organization with good project management maturity of practice, why would baselines become obsolete?
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Sergio

A couple more points:

You said in the first response "the use of baselines means that everything will happen as you planned. In the actual world is difficult to be in that situation."

Sure, life and work are not certain but it is NOT the intention of a baseline so actual performance will perfectly much a plan. I am sure we all would love that to happen but that a fantasy. The real purpose of a baseline is to guide us through the implementation of a project's work. So, it is a guide and our challenge is to stay close to that and correct if we deviate.
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