In project management, a Management Reserve is “an amount of the project budget withheld for management control purposes. These are budgets reserved for unforeseen work that is within the scope of the project. The management reserve is not included in the performance measurement baseline” (PMBOK).
There are three different types of management reserves identified in the PMBOK. These are listed as a Management Reserve, Contingency Reserve, and Activity Contingency Reserve.
Management reserve: Controlled by the management, but not necessarily the PM. This is an overall management reserve that could be spent on any project and has to be approved by the managers above the PM.
Contingency Reserve: a fund controlled by the PM and part of the project budget for any particular contingency within the scope of the project.
Activity Contingency Reserve: a fund specifically earmarked for a high-risk activity that could require more resources to complete. This fund is controlled by the PM and a part of the budget.
Earned Value Management is the process of removing the ambiguity between actual cost and planned cost within a project. EV is calculated as % complete X project budget. When EVM is applied to a project it gives the managers a clear line from which to measure project progress against other known calculations relative to the project’s time line and overall expenses.
Expected Monetary Value (EMV) is another tool in calculating risk costs. EMV is calculated by multiplying the value of each possible outcome by its probability of occurrence. The results of an EMV analysis can be used to determine the size of the reserves for the project. The decision tree listed as Figure 11-6 in the PMBOK shows how EMV can also be used to understand the monetary value of certain outcomes. When charted this decision tree matrix can show managers the probable consequences of their decisions to the project in relation to its cost and profitability to the organization.