Reserves is a buffer in terms of Schedule or Cost while estimating is added to the estimated schedule and cost to account for risks or uncertainties both for known and unknown risks

Padding is unwelcomed practice as it adds unplanned values or reserve over the output of estimations

As explained in the picture, your reserves are tightly tied up with you WBS. It contains a listing of tasks required to carry out the project, and it provides the foundation upon which to produce estimates

Contingency Reserve aka Buffers or time reserves

Contingency reserves are the finance for the project cost estimates by the project manager to deal with uncertain events/risks that may happen i.e known unknowns

The contingency reserve is assigned for activities, work package, or a project. It is appropriate to both time and cost estimates that lead to individual project risks. Also, it is valid for the entire project when a whole project risk is a concern. At times, it is known as contingency allowance considering cost estimates or schedule reserve, especially when considering time estimates. The contingency reserve is associated with known risks and is an unknown risk. Project managers are accountable for controlling the identified risk since they are authorized to use the reserve. Contingency reserves are for potential risk response work identified during the Risk Planning processes.

• Manage identified and unidentified risks defined in Risk Register with Risk Response plan
• The amount is not a random number but is carefully estimated depending on risk management techniques as given in the risk management plan such as Expected Monetary Value (EMV).
• If the known or identified negative risks don’t occur, the contingency reserve is removed.
• The contingency reserve is incorporated in the cost baseline i.e. Cost Baseline = Project Cost Estimate + Contingency Reserve
• The amount is used depending on the organization’s policy and intricacy of the project
• Contingency Reserves are for Active Accepted risk
• They don’t impact the baselines.
• these are managed by Project Manager

Example:

As a project manager, suppose you are managing a crucial building project in an earthquake-prone area. A minor earthquake has recently happened that damaged some of the machinery. Under these circumstances, you will immediately use the Contingency Reserve to replace or repair the broken machinery to keep the project move forward. Here earthquake is a risk to the project (known or unknown) while funding has already set as a contingency reserve to prepare for the risk.

Management Reserve

Management reserve refers to the budget or time reserve used to cope unidentified risks or unknown-unknown.  

Management reserve is not a calculated reserve and neither it’s a part of the cost baseline. Therefore, the project manager needs permission to use this reserve whenever any unknown risk occurs. Many organizations don’t prefer using this reserve since it requires permission on every step of the project. Another important factor is the expertise of the organization. It is less likely that the management reserve will be used if the project management team is proficient in the field and vice versa. In actuality, management reserve is rarely set aside in real-world projects as many organizations provide extra funding upon applications of the project manager in such situations.

• Management reserve is the finance added to the overall project by senior management for unidentified or uncertain events
• The risks are not identified throughout the risk management process
• The reserve is controlled by the senior management of the company after approval
• Management reserve is not included in the cost baseline i.e. Project Budget = Cost Baseline + Management Reserve
• The reserve is kept until the end of the project
• It may have an impact on Baseline after the necessary approvals to use these reserves
• Project Manager usually have no idea about it and

Example:

Far ahead, the site of the project was struck by a tiny asteroid at evening resulted in the devastation of the building foundation. As a project manager, you will perhaps report the event to the senior management who are authorized to use the Management Reserve immediately to clear the area and rebuild the foundation.

Decision Tree

Why Use the Contingency Reserve?**

Why should project managers develop a contingency reserve? Primarily, it is a valuable risk response strategy that helps ensure the project against debilitating time and monetary costs. The basic model works very similarly to insurance, in that a fraction of the time or monetary cost of risk is added to the pool of risk contingency reserve so that the pool can “payout” as any of the risks occur. By pooling the risk contingency costs together so the cost of any risk occurrence can be absorbed, it is easier to track risk occurrence.

Using Contingency Reserve**

The contingency reserve is used when a risk occurs as part of the risk response strategy. The actual impact of the risk is added to the cost or schedule, the estimates are updated, and contingency reserve decreases. The baseline, however, does not change. If risks do not occur, the contingency reserve associated with those risks is not spent, and the project comes in before time and under budget.

Further Readings

1. Cost baseline and Cost budget
2. Work Breakdown Structure
3. Active acceptance and passive acceptance of risk
4. Known Risks and unknown Risks
5. Shrivastava, N. K. (2014). A model to develop and use risk contingency reserve**