A management reserve in project management is a portion of the overall project budget that is kept aside to address any unplanned or unanticipated challenges. If the project runs smoothly and everything goes according to plan, then the management reserve is not used. However, if there are any hiccups in the process or if unforeseen circumstances come up, then management reserves can be used to address these issues.
Management reserve (MR) is defined in the EIA-748 Earned Value Management standard as “an amount of the total budget withheld for management control purposes, rather than being designated for the accomplishment of a specific task or set of tasks.”
The MR is not part of the Project Management Baseline, but it is part of the Contract Budget Base. In other words, it does form part of the calculations when working out how much to bid on a proposal or charge a client. This is the total estimated ‘cost’ of the project. You’d add your fee (the profit) for doing the work on top before telling the client how much the work will cost them.
Do you need management reserve?
Using a management reserve is not mandatory on any project. However, if you work in an earned value environment it is highly advised that you set aside some part of your available funds at the beginning of your project. This will help reduce any risks later on.
Even if you don’t manage your project in line with EVM standards, it is still worth considering how you will manage unforeseen events and keep the project within financial control. We’d advise making use of MR on all projects if you can.
Benefits of using a management reserve in your budget
There are a lot of benefits to using MR on your project – or at least, to having the MR available to you for when it is needed. It helps with proactive risk management, being able to accommodate additional scope items that were originally missed or not considered essential and dealing with unanticipated changes.
Another benefit is that you can authorize its use at lower management levels within the project hierarchy, so the people most likely to understand the implications of risk have access to funding to address problems.
When to use management reserves
In order to successfully complete a project, you need to be flexible and change course when needed. Here are some situations where management reserve could be used:
- New, approved additions to scope once the project is in-flight, for example when activities were missed from the original planning exercise
- To offset rate changes for the cost of labor, materials, fluctuations in exchange rates
- Dealing with unknowns in an uncertain, evolving project
- To address the impact of major rework on schedule in the case that the baseline is now no longer useful for performance measurement and tracking
- When the project management approach changes and this fundamentally alters the performance measure baseline, for example where the expectation was originally to buy in a solution and the new design requires it to be made in-house.
Be careful when suggesting that MR funding can be used for project activities and make sure the approved changes do fall within the guardrails of what MR can be used for.
So how much should you put aside as the management reserve? We have a detailed guide for that. Read more about how to estimate management reserve in compliance with the EIA 748 standard.
Management reserve is not contingency
Management reserves should not be thought of as funding contingency. The money is there to support project control, but not to offset poor estimating or resource overruns. If you aren’t getting the return you expected on a project, for example on throughput on a manufacturing line, that isn’t a reason to crack open the MR to top up the budget.
Management reserves should not be used for:
- Removing a cost variance from project reporting by increasing available funds for an approved activity
- Paying for work that is not an approved scope item.
Equally, you can’t top up MR if a task comes in under budget. MR is part of the contractor’s budget and it might not all be spent during a project. If it is not spent, then it shouldn’t get used up for “extras”. It does not get paid to the client as a bonus if it is not used. It just becomes a number on the project accounting spreadsheet or in a report somewhere.
If this sounds complicated, it really isn’t! It’s all explained in our 2-day EVMS training course that goes into a lot more detail about planning and budgeting on projects.
Management reserves for risk management
There are always risks associated with every project, and management reserves can be a helpful part of your risk management activity. You can’t predict when a risk will be identified or when it will materialize. But you can set aside a portion of funding to support management plans for unforeseen risks.
To be compliant with EIA-748 standards, you will need to establish a management reserve with the view to using it for risk management. The funds can be used to address new and emerging risks.
This is probably the main reason why organizations set up and account for management reserves. It’s a sure-fire way of being able to actively manage and mitigate risks, even when you can’t predict the future.
If the concept of management reserves is new to you, it’s something you will quickly grasp when working in an earned value management compliant environment. Even if you don’t have to manage to those expectations, it is a useful part of your ability to apply appropriate management control across a project.
Download our free guide (.pdf) to using management reserves in an earned value management environment. No registration required!