PMGT5891 Chap.8 Contingency and Management Reserves
Contingency and Management Reserves
Contingency is the money added to a base estimate for estimate uncertainty and identified risk, and the unit treats it as one of the most argued-over lines in any budget. This chapter sets the AACE and PMI definitions side by side, lists what contingency normally excludes, and separates the contingency reserve for known risks from the management reserve a sponsor holds for major surprises and scope change.
You compare a flat percentage allowance with a risk-based figure built from expected monetary values, see how percentile choices from a simulation set contingency, and learn the two PMI ratios used to judge whether remaining contingency still matches remaining exposure.
What this chapter covers
- 01
AACE and PMI definitions of contingency
- 02
What contingency usually excludes
- 03
Contingency reserve versus management reserve
- 04
Fixed percentage, probabilistic and blended methods
- 05
Summing EMVs for risk contingency
- 06
Choosing a percentile such as P50, P80 or P90
- 07
Contingency to ETC and contingency to EMV ratios
- 08
Drawdown, change control and release of unused contingency
Worked example · free
Contingency and management reserve from simulation percentiles
- +1Contingency = P50 minus base = 2.55 minus 2.40 = $0.15M, or $150k.
- +1As a share of base: 0.15 / 2.40 = 0.0625, so contingency is 6.25% of the base estimate.
- +1Management reserve = P90 minus P50 = 2.86 minus 2.55 = $0.31M, or $310k, which brings total funding to $2.86M.
- +1Objection: Hopkinson argues a management reserve should not come from simulation output at all, because risk analysis cannot estimate unknown unknowns, which are the main reason the reserve exists.
Key terms
- Contingency reserve
- A contingency reserve is time or money set aside within the schedule or cost baseline for identified risks that already have planned responses. It covers the known unknowns of a project.
- Management reserve
- A management reserve is funding held by the sponsor outside the project budget for major unforeseen events and approved scope changes. Spending it requires a change to the cost baseline.
- Estimate contingency
- Estimate contingency is the allowance for uncertainty inherent in estimating and for minor errors and omissions. It is not intended to fund major scope change.
- Estimate to complete
- Estimate to complete (ETC) is the forecast cost of the work still to be done on a project. In the PMI contingency ratio it is measured excluding contingency.
- Deterministic percentage contingency
- Deterministic percentage contingency is a single allowance set as a fixed share of the base estimate, such as 10%. Baccarini describes it as the most common method in practice.
- Contingency reserve analysis
- Contingency reserve analysis is the periodic comparison of remaining contingency with remaining estimate uncertainty and risk exposure. It tells sponsors whether the reserve is still adequate.
Contingency and Management Reserves FAQ
Is project contingency meant to be spent?
Yes, according to AACE, which describes contingency as expected to be expended. It is an estimate line like any other, sized for costs that experience says will arise in total even though no one knows which items will trigger. Treating it as fat to be cut is what makes the topic controversial with management.
Which percentile should a project use to set contingency?
Practice varies. Baccarini reports Clark favouring P50 when many projects share an annual budget, P80 or P90 for large strategic projects and P95 at preliminary stages; some United Kingdom bodies use P50 while Network Rail uses P80; and the Australian Federal Infrastructure unit requires estimates at P90. Contractors bidding competitively tend to stay near P50.
Can unused contingency be released before a project finishes?
It can. In the PMI article's case, sponsors revisit release once the ratio of contingency to ETC rises and risks expire without occurring, so the money can return to the wider budget. Baccarini records the opposing view from the Infrastructure Risk Group: letting managers retain contingency to completion encourages them to treat risks aggressively without fear of losing funds.
Why is a flat 10% contingency criticised?
A flat percentage has no stated confidence level, invites hidden padding inside line items on top of the visible allowance, and implies more certainty than exists. Baccarini cites the Channel Tunnel prospectus, which judged 10% a reasonable allowance, before construction costs ended up 80% over. The method suits only early scoping, when information is too thin for analysis.
Exam move
Learn the definitions as a contrast pair: be able to say in two sentences what a contingency reserve covers, who holds a management reserve, and why scope change and escalation sit outside contingency. Next, practise the three ways of setting contingency on one invented project: a flat percentage, summed EMVs from a short risk register, and a percentile read from a simulation table.
Note how far apart the answers land and explain why. Then drill the two PMI ratios with fresh numbers until you can calculate them and state the status in under two minutes. For written answers, always say who controls each layer of money and what would trigger a drawdown or a release.
Finish by preparing a short critique of each method, since the unit asks you to read contingency guidance with a critical mindset and to draw on more than one reference.
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