Introduction

Project reserves are like having a safety net; they’re there to catch you if things don’t go exactly as planned. Here’s why they’re so crucial:

1. Risk Management: Every project has uncertainties and risks. Reserves provide a financial buffer to handle unexpected costs without derailing the entire project.
2. Flexibility: With reserves, you have the flexibility to address changes in scope, schedule delays, or additional resource requirements, ensuring the project can adapt without significant setbacks.
3. Stakeholder Confidence: Having reserves shows stakeholders that the project is well-planned and prepared for potential issues, which can boost their confidence in the project’s success.
4. Continuity: In case of unforeseen events, such as sudden changes in market conditions or supplier issues, reserves ensure that the project can continue to move forward rather than coming to a halt.
5. Contingency Planning: Reserves are part of a broader contingency plan, allowing project managers to navigate through problems smoothly and keep the project on track.

Project reserves act as a safeguard, helping to ensure that the project can weather any storms and reach its goals effectively.

Types of Reserves

In project management, reserves are crucial for dealing with uncertainties and risks. However, there are a few scenarios where you might not need to establish these reserves, like a highly predictable project, a small-scale project, or a fully fixed-price contract.

Here are the main types of reserves you should consider:

1. Contingency Reserve (Known Unknowns):
   • Purpose: To cover known risks that are identified and planned for. For example, if you have 15% rate of turnover of IT personnel, you can use this reserve to pay for recruiting and training costs.
   • When to Have: Allocate funds based on risk assessments and historical data. Always include in the cost baseline as part of your overall project budget to handle known risks.
     
2. Management Reserve(Unknown Unknowns):
   • Purpose: For unknown or unforeseen risks that could affect the project. For example, the PM gets sick for three weeks or a major supplier goes out of business.
   • When to Have: The management reserve is controlled by senior management and is only used in exceptional circumstances that go beyond the project team’s control. It is essential to have this reserve when there is a high degree of uncertainty or complexities like high-risk projects, long-term projects, innovation and R&D projects, strategic changes, and regulatory and market changes. This is not part of your cost baseline but included in the overall project budget.
     
3. Schedule Reserve (Time Buffer):
   • Purpose: Extra time added to the project schedule to account for unexpected delays. For example, weather delays, supply chain disruptions, or labor shortages.
   • When to Have: Include in your project timeline, particularly for tasks with high uncertainty. Always include in the cost baseline as part of your overall project budget to handle delays.
     
4. Cost Reserve (Budget Buffer):
   • Purpose: Like contingency reserve but focused specifically on unexpected cost increases. For example, hiring additional software developers or purchasing extra licenses.
   • When to Have: This is all about being prepared for the unexpected and maintaining project stability. Always include in the cost baseline as part of your overall project budget to handle unforeseen expenses.

When to Have Reserves

• Early Planning: Identify potential risks and uncertainties during the project planning phase and allocate reserves accordingly.
• Risk Management: Regular project review meetings with stakeholders and management include discussions on reserve usage and any adjustments needed based on current project status and risks.

These reserves provide a safety net, ensuring your project stays on track despite uncertainties. Managing them effectively involves regular monitoring and adjustments as the project progresses to insure effective project cost management.

Summary

We have attempted to view the above reserves using deterministic assumptions – that is, nothing will happen outside of the original planned scope and time estimates. The fact is that a project exists in a very dynamic environment with things changing all the time. Any deviation from the plan has the potential to impact scope, time, or cost estimates. By planning and managing reserves, project managers can absorb uncertainty without sacrificing control — turning risk into resilience.

Your feedback is always welcome here in the comments.