How to Successfully Plan Reserves for Your Project

How to Successfully Plan Reserves for Your Project in Project Management

Projects rarely execute as planned. You will encounter impediments, risks materialize, or your assumptions don’t play out as planned. Therefore, when planning your project, you may use time or financial buffers in your schedule to compensate for potential time or cost overruns. Buffers or reserves in projects are important, but they are very often misused or hidden in work packages. In this article you will learn how to correctly apply and monitor buffers and reserves in project planning. Curious how to do this? Then read on immediately.

Buffers and Reserves for Unexpected Problems

Reserves in work packages and at project end
Reserves from work packages combined

You probably also know projects that were derailed by unexpected problems and suddenly lasted longer and cost more than planned. Such problems could very often be avoided by sound risk management and by cleverly placing time or financial buffers or reserves in the project schedule.

Buffers or reserves are unfortunately often hidden in the project schedule in work packages or any positions, so that the senior management does not see it. This is bad project management! Openly stated reserves clearly promote their acceptance and transparency between the project manager and the senior management. Project managers who do not define clearly stated reserves in their project planning work unprofessionally according to PMBOK Guide

The Critical Chain Method is very helpful when it comes to using and managing buffers intelligently, reducing project duration to a minimum and reducing schedule and cost risks. Learn more in the next section.

Project managers who do not define clearly defined reserves in their project planning work unprofessionally according to PMBOK Guide.

The Critical Chain Method and Buffers

The Critical Chain Method is based on the “Theory of Constraints (TOC)” and is regarded as a further development of the Critical Path Method from the network planning technique. With this method, first introduced by Eliyahu Goldratt in 1997, time buffers are intelligently defined and managed in project planning.

With the Critical Chain Method, the individual tasks no longer contain buffer times, but are planned according to their optimistic duration and start at the earliest possible point in time. The time buffers, for example the difference between optimistic duration and pessimistic duration, are cumulated and appended to critical points in the network diagram and/or at the end of the project as a common buffer (see figure below). This protects the project against risks that affect time planning. At the same time, the optimistic estimation of the duration of the processes typically shortens the project duration by 15 to 25%. This also helps to avoid the student syndrome (do the work at the last minute). But also the Parkinson’s Law, which reads: “work expands so as to fill the time available for its completion”, is eliminated.

Critical Chain and Project Puffer
The Critical Chain Principle with Feeder and Project Buffer

On the critical chain, where work packages depend on supplier work packages, points with potential risks arise. If a feeder work package is delayed and does not have a time buffer to the next work package, this inevitably has a negative impact on the critical chain. At these points, you should set defined time buffers (feeder buffers) if it makes sense. The “critical chain principle” clearly takes into account that there are work packages that take longer because they are optimistically estimated. These buffers are intended for this purpose.

Here are my three most important tips on buffers:

  • Do not hide buffers and reserves, but show and communicate them. This is professional project management and increases their acceptance.
  • Define buffers sparingly in your project schedule.
  • Time buffers are useful for external deliveries on the critical path and at the end of the project.

Actions Are Not Free of Charge!

Actions to prevent risks usually costs money and time. But where do the money and time come from? Everything is already planned, isn’t it? You will certainly remember that you will identify risks throughout the entire project and plan appropriate actions if necessary. Risks will also occur that you have not identified. That’s why you have to plan reserves for unforeseen events right from the start of the project – otherwise you will run to the sponsor every two weeks asking for more budget or more time.

Those who do not plan any reserves in their project or who hide the reserves “invisibly” in any work packages acts negligently! As hard as it sounds, a professional project manager plans clearly defined reserves.

Do not hide buffers and reserves, but show and communicate them. This is professional project management and increases their acceptance.

How to Plan Reserves Correctly

You will not be able to identify all risks in your project, no matter how hard you try. For unidentified risks, or risks for which you have not defined any measures, you must therefore create reserves to finance any emergency actions that may occur. You should clearly identify reserves in your project planning. In the large projects of the American government (e.g. DOD, DOE, NASA), but also in the PMBOK, the Management Reserve and Contingency Reserve are used. Even if you use Earned Value Management, financial reserves have a special significance.

Each of these large organizations has similar standards for the Management Reserve and Contingency Reserve. The version described here is based on these standards.

  • Management Reserve: for unidentified risks (the unknown unknowns)
  • Contingency Reserve: for identified risks (the known unknowns) for which no measures have been defined.

Reserves are only intended for unexpected events. If actions are defined for risks, they are planned like any other activity in the project schedule.

The Management Reserve

The Management Reserve (MR) is a financial amount used for risks not identified in the risk analysis. The MR is part of the released but withheld project or contract budget and is under “management control”.

The Management Reserve has the following characteristics:

  • It is used for actions when unidentified risks occur.
  • It is part of the project budget and is only used for the authorized project scope.
  • It is not part of the baseline, i.e. it is not included in performance measurement of the project.
  • To allocate a part of the management reserve to the performance measurement baseline, a change request and the approval of the management are necessary.

The management reserve is usually calculated as a percentage of the total project cost and is between 2 and 15%. The size depends on the project type, the defined contingency reserve for identified risks and the effort used for the risk analysis. This means that the more effort that was spent on a detailed risk analysis and the better the level of risk of the project is understood, the smaller the management reserve is.

Every larger organization will define in its project governance how reserves are planned and used in projects. For example, there are organizations in which the management reserve is not part of the project budget, but is planned as a reserve for all projects of an organization in the project portfolio. It must then be applied for via the project portfolio committee, for example, if required.

Project Budget Components with Management and Contingency Reserve

The Contingency Reserve

Contingency reserves are created for identified risks for which no action has been defined.  The contingency reserves are often assigned in a separate work package in the WBS (work breakdown structure). Reserves are only used for expenditures that lie within the defined project scope. They are not intended for additional project scope.

The following table contains a few typical examples of how reserves are used:

Contingency and Management Reserve Comparison

The Management Reserve and the Contingency Reserve are openly and clearly stated and are not some hidden buffer. Many of you will now say that these are the first items that senior management will remove from the budget. Therefore, it is usually established that the management reserve is under the control of the client or senior management. It only becomes part of your budget (baseline) when it is effectively distributed.

Schedule Reserve

The Schedule Reserve is similar to the Contingency Reserve. It is a pre-planned time reserve in the project schedule for identified risks, either at critical points in the network and/or at the end of the project. These reserves are also clearly communicated.

The time buffer (slack) in the network, on the other hand, is the length of time an activity or work package can be delayed without affecting the overall project duration.

The following figure shows the Management Reserve and Schedule Reserve in the context of the Total Allocated Budget (TAB) and Negotiated Completion Date. If the costs in the project are incurred as planned (Planned Value), the budget defined at the start of the project (Budget at Completion BAC) is used up. If more than the planned budget is required during the project or if unidentified risks occur, the management reserve is continuously used up. The same applies to the Schedule Reserve.

Schedule Reserve
Schedule and Management Reserve using Earned Value Management

Prepare for risks and plan reserves in your project! The approach presented in this article is a standard accepted by various organizations, including PMBOK Guide. Perhaps what I have written here is too complicated for you. Then consider at least the following points in your project:

  • Do not use any hidden financial or time-related buffers.
  • Plan and disclose financial and time reserves
  • Plan reserves in a separate work package at the end of the project
  • Time reserves after feeder work sheets can also be useful

I hope you could learn again something to make your project even more successful. The following articles will deepen your knowledge in risk management:

The Fallback Plan – When Actions for Risks Are Not Effective
What is the Difference Between Uncertainty and Risk?
Risks, Problems, Issues and Impediments – What is the Difference?

Project-Risk-Management-Book-Cover

Here You Can Find Even More Knowledge

What experience do you have with reserves in projects? Do you agree with my statements or do you have a different opinion? Share your experience with the readers with a comment, so that we can all get to know a different point of view. Thank you!

Would you like to learn more about risk management in projects? My books on Project Risk Management take you an important step further!

Do you know anyone who might be interested in this article? Then simply forward it or share it. Thank you!

Posted in Risk Management.

Leave a Reply

Your email address will not be published.