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Contingency Reserves

5 minutes 5 Questions

Contingency Reserves are funds or budgetary allocations set aside within a project plan to address identified risks that might impact project objectives if they occur. These reserves are specifically for known risks, meaning risks that have been identified and analyzed, and for which proactive risk response strategies have been developed. In project management, particularly within the PMI framework, contingency reserves are an essential aspect of risk management planning. The purpose of contingency reserves is to provide a financial buffer that can be used to implement risk responses without affecting the project's overall budget. This allows project managers to deal with risk events as they arise without the need for additional funding or reallocation of other resources, which can disrupt the project plan. Contingency reserves are calculated based on quantitative risk analysis techniques such as Expected Monetary Value (EMV), which considers the probability and impact of risks. Contingency reserves are controlled by the project manager and are used for specific, identified risks included in the risk register. For instance, if there is a risk of a supplier delay, the cost associated with this delay, and the risk response plan (such as expediting shipping), would have funds allocated in the contingency reserve. Effective management of contingency reserves involves regular monitoring and updating, as new risks are identified and existing risks are retired or change in probability or impact. An important aspect of contingency reserves is that they are planned and approved during the project planning phase, ensuring that stakeholders are aware of and agree to the inclusion of these reserves. Transparency in how contingency reserves are calculated and used builds trust among stakeholders and contributes to effective risk management throughout the project lifecycle.

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PMI-RMP - Contingency Planning and Reserves Example Questions

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Question 1

At the beginning of a project, you created a risk register and identified the contingency reserves needed. Halfway through the project, your sponsor informs you that no more contingency reserves will be granted. What should you do?

Correct Answer: Update the risk register, reassess the project risks and explore alternative risk mitigation strategies.

The best way to handle this situation is to 'Update the risk register, reassess the project risks and explore alternative risk mitigation strategies.' This is because contingencies are not the only solution to mitigate risks. There are other strategies such as avoidance, mitigation, transfer or acceptance. Thus, when a project sponsor informs that no more contingency reserves will be granted, the best course of action is to reassess the risks and come up with alternative strategies. The other responses: 'Ignore the sponsor's instructions and request more reserves.', 'Ask the team to work longer hours to cope with any potential risks.', and 'Stop work until more contingency reserves are made available.' are inappropriate. Ignoring the sponsor's instructions or stopping work are both unprofessional and could lead to challenges in the project. Asking the team to work longer hours could be possible but would not necessarily solve the problem, as it doesn't reduce or address the risks themselves.

Question 2

During a project status meeting, a team member informs the project manager about new risks that were not previously identified. What should the project manager do to address these risks?

Correct Answer: Update the risk register and re-assess the contingency reserve

The best course of action when new risks are identified is to update the risk register. The risk register is a document where all details about the identified risks are recorded and maintained. By updating the risk register, the project manager ensures that all known risks are documented and can be reviewed and addressed appropriately. Updating the risk register also affords an opportunity to reassess the contingency reserve, which is a provision for unforeseen elements of cost within the defined project scope. The contingency reserve could change based on the new risks identified. Now, on to why the other options are less appropriate: Ignoring the risks because they were not identified during the risk planning phase is not a good practice in project management. Risks can arise at any time and they need to be addressed, not ignored. Immediately implementing risk mitigation strategies might not be the best initial approach. Each risk needs to be assessed and the proper response needs to be determined before actions are taken. Informing stakeholders and requesting additional funds could be premature. First, the project manager needs to assess the risks and determine the appropriate course of action, which may or may not require additional funding.

Question 3

A project is halfway complete when a significant risk occurs that was not previously identified. The contingency reserve has been depleted. What should the project manager do?

Correct Answer: Request management reserve funds from stakeholders

The best approach when a project is halfway complete and a significant risk occurs that was not previously identified would be the need to 'Request management reserve funds from stakeholders'. If the contingency reserve has been depleted, the project manager will need the management reserve, which is the amount set aside to respond to unforeseen risks, such as those not previously identified. As for the other options, 'Asking project team members to pay for the risk' is not professional or ethical and is generally against company policies. 'Ignoring the risk and hoping for the best' is also a bad choice. It's not proactive and can lead to a considerable negative impact on the project if the risk materializes. Finally, 'Firing the person responsible for not identifying the risk earlier' is not a solution to the current problem. Risks are inherent in each project, and it's the job of a project manager to manage risks, not to lay blame on others.

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