According to Chapman & Ward, projects involve a high degree of risks and one with absolutely no risks is not worth pursuing. Thus, it is crucial that risk management is considered an integral aspect of project management. Project budgets are prepared, and costs estimated way long before projects are implemented. In fact, a lot of deliberations between experts and the management occurs in this phase. Common sense, appropriate knowledge, and expertise dictate that all aspects of a project are not entirely constant and change is inevitable, therefore, making planning for risk a necessary plan of action. Contingency and Management reserves are focal to the estimation of project costs and budget. Usmani (2012), states that determining contingency and management reserves provides a shield to known and unknown risk thus playing a crucial role in risk management. The assumption that these reserves are the same is quite misleading. Though they serve the same purpose, their elements are very different.
Management reserves are part of the initial planning of the project budget, and in this stage of planning, the estimates of the budget elements have a meager degree of accuracy hence they are not reliable. This reserve thus serves to cater for unidentified risk. The project budget is a sum of the cost baseline and the management reserve. It is entirely under the control of the management, and the project manager cannot access it without the management’s authorization. Its significance is determined by the amount of expertise the organization has on the particular endeavor. A wise manager understands that accurately determining the elements of a project is an almost impossible task; therefore, taking proactive measures is necessary to help curb delays and cost inconveniences. The management reserve is calculated as a percentage of the cost of the cost baseline. Contingency reserves, on the other hand, provide for identified risk. The cost baseline is a sum of the project cost estimate and the contingency reserves. A project manager has control over this reserve and uses it in the face of any of the identified risks. It is calculated as a percentage of the estimated cost. A competent project manager identifies and assesses the risks at hand and strategizes for the same in the budget.
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References
Chapman, C. & Ward, S. (2003). Project Risk Management . Processes Techniques &Insights West Sussex: John Wiley & Sons Ltd
Usmani, F. (2012). Contingency Reserve vs Management Reserve: Retrieved from https://pmstudycircle.com/2012/02/contingency-reserve-vs-management-reserve/
