This is the third in a series of three articles about Management Reserve written by EVM SME Mark Infanti. You can read the previous two articles on this subject here; Management Reserve Defined and Estimating Management Reserve (MR).
Now we have defined what it is and discussed how it is estimated. Now we need to address how it is used. The easy response; “it is to plan for new work scope that has not been planned in the PMB, and is not out of scope to the contract”.
Once you know how much MR that is available, how do you identify and report it?
MR is reported on the Contract Performance Report (CPR) as a lump sum on formats 1 & 2. All uses of the MR would be seen in the baseline change in CPR/IPMR Format 3 and the description of the uses would be explained in Format 5. MR usage should be maintained in an MR Log (or CBB Change Log) that tracks all of the additions to and uses of, MR. This log and process should be identified in your change control procedures.
The MR log is an internal document but is the basis for changes to the baseline reported on CPR/IPMR format 3. If you are audited, this is your backup. Inside the log is a cross reference to the risk log that can support the estimate for all MR in the log.
For an EVM approach to be effective, all work must be planned with a budget. MR allows you to make sure that this rule is followed. But it is still required to be formally authorized, planned and tracked in the log.
Here are 2 examples of cases which require MR.
Example #1 – as part of the development plan, an initial build of a prototype unit was to be shipped to another facility for testing. While in shipment, the unit sustained $300,000 worth of damage. The unit will have to be rebuilt and the entire schedule now has to be changed. Tracking this in-scope change requires that the new work be planned and scheduled.
The budget for the rebuild needs to be planned in the appropriate Control Accounts so the rebuild progress can be measured, like any other work in the project. It is not a contract change; you cannot go to the customer for additional budget. This is where MR is used. This assumes no one identified the accident as a risk, so this change was budgeted from the non-specific portion of the MR.
Example #2 – the source code development testing and correcting cycle was estimated to require three repetitions for a 60% probability of success, but could require up to six cycles. If each of these cycles takes a month and $100,000, each repetition will have a significant impact on the project and needs to be tracked. At the end of three cycles, the code was still not error free enough to pass testing and it was determined that it would take 2 more cycles.
The contract said “test to X standard”, not how many times to test and fix; so it will not be a contract change. Each additional cycle that is required to meet the technical specifications for delivery will need to be planned in all the control accounts affected and the budget will come from MR. Since this was probably identified as a risk to the code development, this MR should come from the portion estimated for code development risk.
In addition to the types of changes addressed in the two examples above, there are times when all Control Accounts are affected by an unexpected change. For instance, the labor union won a 10% pay increase over the amount planned. This means that every production Control Account is likely to incur a 10% cost variance.
If the variance reporting threshold is 10%, every CAM is likely to have to provide a variance analysis based on something that they had no control over. In this case, the PM may choose to allocate MR to all affected CA’s to negate the issue. This “replanning” will have to follow change procedures but is within the purview of the PM.