Definition of Contingency Reserve
Any project has risks that may affect the cost, schedule or quality of the completed work.
The likelihood of some of these risks – often called ‘known unknowns’ – can be assessed and their typical cost can be calculated. The result is the contingency reserve. This amount is part of the project cost and can be called on as the expected risks materialise. The project manager may be able to control access to the contingency reserve, depending on the authority matrix.
The project as a whole has a contingency reserve. The size of this contingency should depend on the risks and may be:
- - a percentage of the project cost (meaning the sum of the estimated costs of all contract and/or work packages). Typically in the range 3-10% and mainly used for smaller projects.
- - a calculation of the Expected Monetary Value (EMV) of all known risks, and calculated for the estimated (cost) impact multiplied by the probability of the risk occurring.
- - Decision Tree Analysis - similar to EMV but assessed for multiple branches of the options and events that might occur, or be chosen.
- - Monte Carlo simulation - sophisticated quantitative cost risk analysis.
Each contract or work package may also have some contingency amount associated with it.
It is obviously important that there is good control over this - to ensure that contingencies are not counted twice, for example.
There are other risks to a project that cannot be foreseen or planned for, often called ‘unknown unknowns’. The management reserve is intended to cover this risk.
There is a high-level description of reserves and contingencies here.