If you have ever taken a course in project management, you may have learned the differences between contingency and management reserves. The former are used to protect project cost or schedule objectives from the impacts of identified, realized risks whereas the latter are used to address the impacts of unidentified risks. Project managers usually have the authority to utilize contingency reserves as identified risks are realized whereas they would normally seek approval from a higher authority such as a steering committee to use management reserves.
A challenging task faced by many project managers is defending contingency reserve amounts their teams have estimated are required for their projects. Sponsors or customers might understandably be hesitant to tie valuable funds up for events which may not occur as this represents unwanted opportunity costs. Some stakeholders might even be reluctant to think that things might go wrong with their projects. Expected monetary value can be used as part of quantitative risk analysis to justify reserves but that might not be enough to convince stakeholders who don’t see the rationale in putting anything aside for contingency.
In such cases, educating them on why contingency reserves are important by using stories might work.
Ask the stakeholder if they own a home and whether they put any money aside each year for maintenance. Most folks would likely say that they do. Ask them why they do that. They’d likely say it is to avoid their having to cut planned expenses from discretionary accounts when they need to do some repairs or replacements in their homes over the course of the year.
Ask them if they own a car. If they do, ask them why they pay for car insurance. They’d would likely answer that it is to save them from significant repair or liability charges if they get into an accident or if their car gets stolen. Ask them what would happen if they didn’t have insurance and as a result of an accident they needed more money than they could easily free up. They’d likely answer that they’d have to go to their bank and ask for a loan.
Finally, ask if they have teenage kids and if they give those kids a weekly allowance to pay for discretionary purchases. If they do, ask them how they react when their kids spend all of their weekly allowance and have to come to them for more money because they want to buy something.
Management reserves are the equivalent of having to go to our parents or our bank for loans or liquidating other other investments when risks get realized. It is bad enough when we have to request them to protect us from the impacts of unknown unknowns but even worse when they get used for identified, realized risks because we were unable or unwilling to secure contingency reserves.
Contingency reserves should not be considered a nice-to-have expense when budgeting for your projects. Securing them is the responsible thing to do to deal with the uncertainties which are always present when delivering projects.