Contingency Reserves x Management Reserves

In this podcast, Ricardo talks about the difference between the Contingency Reserve and the Management Reserves. He explains that both work with a financial protection for the project and that the management reserve is about the perception of the risks of the company.

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Episode transcript

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Hello everybody welcome to the five minutes PM podcast today. I like to discuss one email message that I receive at this week asking me to explain about the difference between Contingency Reserves and Management, Reserves thinking in the risk management perspective, before we explain the difference between this to kind of Reserves, we need to explain what is a Reserve Reserve is an amount of money that we usually insert inside the, our project budget two, protect our budget against.

why we think that we need to think about that because when we prepare our Bridgette, usually we think always in the perfect conditions, risk, free environment, but the knower or real life in the real life, it's different. It's really different because we have many, many threats and some opportunities in the project environment that we need to consider because this threats, if they become true, they can change dramatically, our project budget.

And some of these risks, we really know they are listed in our risk register, but some of them, we don't know, we we'll know. Then when they become true, when they become real problems or real, an aspect that advantages and this difference now the, if the risk exists and unknown risks, they will explain what his Management Reserves and Contingency Reserves to calculate and think about continuous Reserve.

First. We need to think that Contingency, Reserves it's to protect our project against the risks that I know, the 400 risks that I have in my risk register, or the 300 risks that I have there. And how do I calculate the Contingency Reserves first, I need to move to apply probability times impact let's give an example. One trap is 10% probability of loss at 1000 us dollars, 10% of 1000 means $100 exposition.

This is what we call E M VI or expected monetary value. If we do this for 400 risks, and if we sum up all of them, we'll have the project EMV, and this is the amount of money we suppose that this will be our contingency reserve, that this amount let's suppose $1 million, $500,000. This will protect us from all this four or 500 risks.

An why this, because we always think that's some risks to school happen and some will not happen. And now some opportunites will happen and some opportunities will not happen. So in average, this amount will protect our budget against the risks that I know there's risk score. It will become the Contingency Reserves will drive the Contingency Reserves in your hand, we need our soul to protect ourselves against the risks that we don't know.

Usually the Management Reserves, we'll be a percent of the project budget that will variety related to the perceived risks that we have in this project. And also the risk tolerance of the company. I can do maybe 3% of the project budget for percent, 5% or 10%. It will depend off the project. It will depend off the environment. And if I sum up the stool Reserves they will become the project Reserve and we use usually one explanation that is quite interesting is that the Contingency Reserve is designed by the known and knows.

What do I mean by that is the uncertainty that I know the risks that I know that I'm running. I don't know if they will happen, but I know that they exist. And the Management Reserves I apologize for my accent it's for the unknown and knows what do I mean by that is the uncertainty it's that I don't know if they exist or not. I'm completely blind on those risks.

So what I need to do, I need to guess, and the amount of my project budget to protect myself against this risk. If I have a good risk management plan, a very good risk identification process, I can challenge myself to reduce the Management Reserves because I think that almost all possible risks identify it, but if I don't have does a strong process, or if my project is really, really under a huge uncertainty, I need to put money on the Management Reserves it's really important.

Each not maybe to calculate the Contingency Reserves its easier because usually we do use an EMV probability times impact, but the Management Reserves, it's much more a filling and the perception of the pro's that the environment to define it. And it's really important to mix this art and mathematics cause in science to drive the risks because they are they're. It's not because we are putting down on paper that they will become reality or not.

We need to prepare ourselves against this uncertainty to drive or project to good and bad or results. I hope you enjoy this podcast. I wish you are risk free, quick and see you next week with another five minutes PM. Podcast bye. Bye.

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Contingency Reserves x Management Reserves

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