Creating a Reserve Analysis

Do you think it'll snow next December in Michigan? I do, too. But do we know on what exact date? That's a quick and easy example of a "known unknown." You know that something is likely to occur, but you just don't when or to what degree. Projects are full of known unknowns, and the most common deals with costs. Based on experience, the nature of the work, or fear, you suspect that some activities in your project will cost more than expected—that's a known unknown.

Rather than combating known unknowns by padding costs with extra monies, the PMBOK suggests that we create "contingency allowances" to account for these overruns in costs. The contingency allowances are used at the project manager's discretion to counteract cost overruns for schedule activities.

In Chapter 6, we discussed the concept of management reserve for time overruns. This is a related concept when it comes to the cost reserve for projects. This reserve is sometimes called contingency reserve, and is traditionally set aside for cost overruns due to risks that have affected the project's cost baseline. Contingency reserves can be managed in a number of different ways. The most common is to set aside an allotment of funds for the identified risks within the project. Another approach is to create a slush fund for the entire project for identified risks and known unknowns. The final approach is an allotment of funds for categories of components based on the WBS and the project schedule.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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