Reserve analysis is pivotal in project management, proving our standout team performance. As a project manager, I have faced difficult times during the pandemic situation in managing projects. However, I've demonstrated my vision, strategic planning, and skillful risk management using Reserve Analysis for the successful completion of the project.
In this article, I will explore reserve analysis - what it is, how it works, why it is crucial, and what are the best practices. Whether you are involved in large-scale construction projects or work with an IT development team, it is highly recommended that you familiarize yourself with reserve analysis to ensure timely and cost-effective project completion. The PMP certification online training is the best choice to acquire knowledge in reserve analysis and, in the meantime, for the progress of a professional career. Adopting the below-mentioned reserve analysis methods and their steps in your real-world projects helps in successful results.
What is Reserve Analysis in Project Management?
Reserve analysis is a means of keeping updated on sudden risks with resources that may include funds, materials, and a workforce to complete the project effectively. Reserve analysis aims to ensure sufficient supplies are available in case of unexpected project delays. There are two types of reserves: contingency reserves and management reserves.
Reserve analysis in project management has many benefits, including helping projects succeed and run smoothly. In short, PMP reserve analysis entails proactive planning and assigning additional time, budget, or resources to manage uncertainties and risks to improve project success in the face of unforeseen issues.
Why is Reserve Analysis Important?
Reserve analysis plays a vital role in project management. For instance, if a project that typically takes 30 days to complete faces unexpected risks that could cause delays, it's essential to estimate the potential risks and allocate sufficient funds to avoid them. Reserve analysis makes it easier to calculate and prepare for such risks. There are many other reasons why reserve analysis is crucial in project management, a few mentioned below:
- Reserve analysis evaluates project risks, improving risk management.
- A safety net against unforeseen circumstances is built with reserves. It lets project managers respond quickly without damaging project success.
- Reserve analysis provides transparent communication regarding the availability of resources. It builds trust among the stakeholders, clients, and team members.
- Reserves play a crucial role in mitigating budget overruns and unanticipated project delays.
Reserve analysis is also considered one of the crucial topics in courses for Project Management. As an aspirant to become a project manager, this topic helped me crack my interview and career growth as a successful project manager.
Types of Reserves in Project Management
There are mainly two types of reserves, and I’ve discussed them below in detail.
1. Contingency Reserve
Contingency reserves in project management are additional time or budget allocated to mitigate known risks and uncertainties during the project's duration. Most of the time, the project manager sets and manages the contingency reserves. These reserves are based on the expected risks that come with the project.
Risk management planning identifies contingency reserves based on project unknowns and uncertainties. They enable proactive risk management, allowing the project team to adapt to unexpected issues without compromising project success. Contingency reserves are monitored and adjusted during the project's life cycle to improve adaptation and resilience.
2. Management Reserves:
Management reserves are duration or budget preserved by top management or project sponsors to meet unforeseen events or emergencies. Contingency reserves are managed by the project manager and disclosed to the team, while management reserves are typically kept at a higher level and may not be disclosed.
Unexpected events or substantial disruptions beyond the project team's control require management reserves. They are designated for project uncertainties rather than particular risks, ensuring the project can adjust to unexpected obstacles throughout its lifecycle.
Contingency Reserve vs Management Reserve
We can understand contingency reserve analysis and management reserve concepts by comparing them to each other below:
Sl No | Contingency Reserve | Management Reserve |
1 | This type of reserve is controlled by the project manager. | It is controlled by upper management |
2 | The risks and allocated reserves may be communicated among the project team | May not be communicated among the project team members. |
3 | These reserves are allocated by calculating them using various methods such as decision tree analysis, expected monetary value (EMV), etc. | These reserves are not estimated but fixed according to the organizational policy. |
4 | The project manager will have full access to these funds and doesn't require any approval. | The project manager can avail of these funds only after approval from higher management. |
5 | To manage specific risks or known risks identified during team planning | For managing unforeseen risks, unknown-unknowns. |
When Should You Perform Reserve Analysis During a Project?
Conducting reserve analysis during critical stages of its life cycle is essential for ensuring efficient risk management and the capacity to adjust to evolving conditions. The following are the stages when reserve analysis is conducted:
- Initiation Stage: Conduct initial reserve analysis during project start-up to identify risks and uncertainties.
- Planning Stage: Refine and update reserve analysis during project planning to distribute contingency reserves based on risk understanding and to set criteria for using time, money, and scope reserves.
- Execution Stage: Monitor project progress and modify reserves when new or existing risks arise.
- Closure: Finally, complete reserve analysis to close out and account for all reserves in project closure documentation.
How to Determine Project Reserves?
Aspiring project managers must know how to calculate project reserves. It is crucial to project success. Management reserves are usually set by company policy. Usually, 5–20% of the project money is set aside.
Determining contingency reserves involves identifying project risks and uncertainties and assigning resources to solve them. Three popular methods for determining contingency reserves:
Method 1: Percentage of Estimated Cost
The percentage of estimated expenses technique accounts for unanticipated risks and uncertainties by allocating a predetermined percentage of the project cost. This simple strategy ensures that reserves match the project's size and complexity.
This strategy sets aside a proportional amount for unforeseen events, usually a percentage of the project budget. For example, If a $100,000 project has a 10% contingency, $10,000 is set aside for uncertainty management.
Contingency Reserve = Estimated project cost × (Contingency percentage/100)
Contingency reserve = $100,000 × (10/100) = $10,000
Method 2: Expected Monetary Value (EMV)
EMV estimates the financial worth of risks in contingency reserves. Calculate the EMV formula by multiplying the probability of a risky event occurring by the project's potential cost.
EMV = probability × impact
Consider the construction project where there is a 30% chance of delay due to rainy conditions. This delay costs $1000,000 for idle manpower and extra precautionary work.
The EMV for this specific risk event would be 0.30 × $100,000 = $30,000.
Adding this EMV of $30,000 to the main project budget.
Method 3: Guessing based on the Historical data
Contingency reserve guessing includes estimating or assuming project risks and uncertainties based on past projects with similar characteristics. The Delphi Technique involves experts anonymously submitting risk assessments, which the facilitator aggregates and shares until an understanding is formed.
Best Practices for Reserve Analysis in Project Management
When doing reserve analysis for your projects, the following are some of the best practices you can do:
- Identification of Risks: Identify and document risks early in the project. Discuss project risks with stakeholders and utilize previous data to identify them. Reserve analysis is more accurate with a more thorough risk assessment.
- Stakeholder Involvement: Participate in the reserve analysis procedure alongside the appropriate stakeholders. Their participation can improve risk awareness and response strategy.
- Regular risk reviews: Risks change throughout a project's lifetime. To keep the original risk assessment relevant, evaluate it regularly. New and severe risks may arise as the project advances.
- Effective Documentation and Communication: Document the reasons behind decisions regarding contingency reserves. Stakeholder alignment and understanding of reserve analysis require transparent communication. This helps everyone understand risks and reserves.
- Update Risk Register Time to Time: Keep the risk register updated throughout the project. New risks and changes in risk impact or probability may occur.
- Use Historical Data: Reserve analysis can benefit from past data and project lessons. This helps understand typical risks and their effects.
Any PMP certification aspirant must learn about best practices for reserve analysis, a goal attainable through KnowledgeHut's best PMP course.
Conclusion
Reserve analysis is dynamic and essential to project management. It helps you if your goal is to be a Project manager or prospective professional, you can succeed in the dynamic project management world by adopting the above ideas, improving techniques, and adapting to change.
Reserve analysis is essential for prospective project managers to manage and deliver projects. Success requires a holistic risk management approach, industry awareness, and quantitative analysis skills. Fostering good communication skills to explain reserve decisions to stakeholders will increase project transparency and trust.
In the future, project management will change undoubtedly with new challenges. You should monitor new technology, methods, and worldwide trends that may affect your projects. Be updated and all the best for the next ventures in the PMP world.
