Project Cost Rework: Contingency Reserves for Known-Risks
PMBOK v8 Definition
Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty. Contingency reserves are the budget within the cost baseline that is allocated for identified risks. Contingency reserves are often viewed as the part of the budget intended to address the known-unknowns that can affect a project. For example, rework for some project deliverables could be anticipated, while the amount of this rework is unknown. Contingency reserves may be estimated to account for this unknown amount of rework. Contingency reserves can be provided at any level from the specific activity to the entire project.
Why It Matters for the Exam
The PMI exam frequently tests your ability to distinguish between contingency reserves (for known-unknowns) and management reserves (for unknown-unknowns), as well as where each sits in the budget buildup. Questions often present a scenario involving rework, cost uncertainty, or risk response and ask which type of reserve applies or how the budget baseline is affected. Expect 2-3 questions on reserve types, their placement in the cost baseline, and their control procedures.
Key Points to Remember (for the exam)
- Definition: Contingency reserves are budget within the cost baseline allocated for identified risks (known-unknowns).
- Purpose: Address cost uncertainty, such as anticipated rework where the amount is unknown.
- Placement: Contingency reserves are part of the cost baseline (see Figure 2-25, left side scenario). Management reserves are outside the cost baseline.
- Authority: Contingency reserves can be used by the project manager within the defined authority; management reserves require formal change control.
- Risk Classification: Contingency reserves = known-unknowns. Management reserves = unknown-unknowns.
- Level of Application: Can be provided at any level from the specific activity to the entire project.
- Control: The cost baseline (including contingency reserves) can be changed only through formal change control procedures.
Typical PMI Exam Example
Your project has identified a risk of rework on three deliverables due to potential quality issues. The exact amount of rework is unknown. During cost estimation, you include $50,000 to cover this potential rework. This $50,000 is:
- A) Management reserve
- B) Contingency reserve
- C) Cost baseline
- D) Project funding
Answer: B) Contingency reserve (it addresses known-unknowns for identified risks).
PMI Exam Traps
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Trap: Confusing contingency reserve with management reserve.
- Reality: Contingency reserve = known-unknowns (inside cost baseline); management reserve = unknown-unknowns (outside cost baseline).
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Trap: Thinking contingency reserves are part of the initial project budget but not the cost baseline.
- Reality: Contingency reserves are within the cost baseline. The cost baseline includes work cost estimates plus contingency reserve (Figure 2-25, left side).
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Trap: Assuming all rework is covered by management reserve.
- Reality: Rework for identified risks (even if amount is unknown) is covered by contingency reserve. Only truly unforeseeable rework uses management reserve.
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Trap: Believing contingency reserves can be changed without formal control.
- Reality: The cost baseline (including contingency reserves) can be changed only through formal change control procedures.
Important PMI Connections
| Related Concept | Relationship Type | Exam Attention Point |
|---|---|---|
| Management Reserve | Opposes / Complements | Contingency reserve is inside cost baseline (known-unknowns); management reserve is outside (unknown-unknowns). Exam tests which reserve covers which risk type. |
| Cost Baseline | Contains | Contingency reserve is part of the cost baseline. Management reserve is not. Exam tests budget buildup hierarchy. |
| Risk Performance Domain | Source of concept | Contingency reserve is allocated for identified risks with active response strategies. Exam links risk identification to reserve allocation. |
| Reserve Analysis | Analytical technique | Used to evaluate whether the remaining reserve is sufficient for remaining risk. Exam tests this as a tool for monitoring reserves. |
Quick Review Questions
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What type of risk do contingency reserves address: known-unknowns or unknown-unknowns?
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Is the contingency reserve part of the cost baseline or outside the cost baseline?
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Can the project manager use contingency reserves without formal change control, or is formal approval always required?
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A project has identified a risk of weather delays. The exact number of delay days is unknown. Should the reserve for this risk be classified as contingency or management?
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What is the name of the analytical technique used to determine whether the remaining reserve is sufficient for the remaining risk?
PMBOK v8 Reference
Section 2.7 - Risk Performance Domain (see also Figure 2-25 and Reserve Analysis description in the Cost domain)