Management Reserves are budgetary allocations set aside to address unforeseen work or unplanned changes in the scope that are outside the project's baseline but within the overall project objectives. Unlike contingency reserves, which are allocated for identified risks, management reserves are inte…Management Reserves are budgetary allocations set aside to address unforeseen work or unplanned changes in the scope that are outside the project's baseline but within the overall project objectives. Unlike contingency reserves, which are allocated for identified risks, management reserves are intended for 'unknown unknowns'—risks that are not identified during the risk management planning process. In the PMI framework, management reserves are a component of the project budget but are not included in the project's cost baseline; they are held and controlled by higher management levels.
Management reserves provide a financial buffer that allows the organization to respond to unexpected events without derailing the project or necessitating additional funding requests. These reserves can be used for significant scope changes, unforeseen regulatory changes, or other events that could not have been predicted. The use of management reserves typically requires approval from senior management or stakeholders because it involves changes to the project's cost baseline.
The management reserve is not a substitute for proper risk management planning. Instead, it complements the contingency reserves by providing an additional layer of financial protection. Effective communication is essential when accessing the management reserves, as stakeholders need to understand why the funds are being used and how it will affect the project's objectives and deliverables.
In terms of project control, management reserves are not included in performance measurement baselines. This means that project performance reports don't consider management reserves when tracking project progress against the baseline. It's crucial for project managers to differentiate between contingency reserves and management reserves in their planning and reporting, to maintain transparency and avoid confusion among stakeholders regarding the project's financial health.
Management Reserves: Full Guide for PMI-RMP Exam
What are Management Reserves?
Management reserves are funds set aside for unforeseen risks or changes within a project that are within the project scope but were not specifically identified during risk planning. They are distinct from contingency reserves, which address known-unknown risks that have been identified during risk assessment.
Why Management Reserves are Important
Management reserves are crucial because they provide financial flexibility to deal with unknown-unknown risks or unplanned changes that inevitably occur in projects. They:
- Prevent the need to request additional funding mid-project - Give project managers autonomy to respond to unexpected issues - Protect the project from disruption due to unforeseeable events - Demonstrate prudent financial governance to stakeholders
How Management Reserves Work
1. Allocation: Management reserves are typically set as a percentage of the total project budget (often 5-10%, though this varies by industry and project complexity)
2. Ownership: Unlike contingency reserves, management reserves are controlled by senior management or the project sponsor, not the project manager
3. Release process: Accessing management reserves usually requires formal approval through a change control process
4. Not included in baselines: Management reserves are held separately from the project cost baseline
5. Documentation: Usage of management reserves should be thoroughly documented to maintain transparency
Management Reserves vs. Contingency Reserves
Management Reserves: - Address unknown-unknown risks - Controlled by management/sponsor - Not included in cost performance baseline - For risks not identified during planning
Contingency Reserves: - Address known-unknown risks - Controlled by project manager - Included in cost performance baseline - Based on identified risks during planning
Exam Tips: Answering Questions on Management Reserves
1. Terminology precision: Always distinguish between management reserves and contingency reserves in your answers
2. Authority recognition: Remember that the project manager does not have authority over management reserves
3. Budget relationships: Know that management reserves are not part of the cost performance baseline but are part of the project budget
4. Application scenarios: Be able to identify scenarios where management reserves would be appropriate vs. contingency reserves
5. Risk categories: Connect management reserves to unknown-unknown risks rather than identified risks
6. Process connections: Understand how management reserves interact with other project management processes, especially change control
7. Calculation awareness: While exact formulas may vary, understand that management reserves are generally calculated as a percentage of the project cost
8. Looking for distractors: In multiple choice questions, be alert for answers that confuse the attributes of management and contingency reserves
When practicing exam questions, focus on the governance aspects of management reserves and their relationship to the overall risk management framework. Understanding the nuanced differences between various types of reserves will help you select the correct answers on the PMI-RMP exam.