Contingency Reserve Calculations for PMI RMP Exam

Introduction

• Focus on importance of contingency reserve calculations
• Two types of reserves:
  • Contingency Reserves: For known unknowns (residual risks)
  • Management Reserves: For unknown unknowns (risks not identified earlier)

Key Concepts

• Contingency Reserves:

  • Used for pre-identified risks
  • Calculated using a mathematical method (Expected Monetary Value)
  • Finance cost estimates to deal with uncertain events
  • Assigned at activity, work package, or project level

• Management Reserves:

  • No specific mathematical method
  • Usually a percentage of total project cost/duration (2-15%)
  • Not part of the cost baseline, but part of the overall project budget

Cost and Schedule Baselines

• Cost Baseline:

  • Cost of project activities + contingency reserves
  • Does not include management reserve

• Schedule Baseline:

  • Critical path + contingency reserve
  • Project schedule = schedule baseline + management reserve

Example Calculations

Example 1:

• Project: New product manufacturing
• Initial Cost: $195,000
• Initial Duration: 200 days
• Risk Analysis:
  • Risk 1: Threat (20% probability, 30 days delay) = +6 days
  • Risk 2: Opportunity (10% probability, 20 days early) = -2 days
  • Risk 3: Threat (15% probability, 80 days delay) = +12 days
  • Risk 4: Threat (30% probability, 100 days delay) = +30 days
  • Risk 5: Opportunity (25% probability, 40 days early) = -10 days
• Contingency Reserve Calculation: 6 - 2 + 12 + 30 - 10 = 36 days

Example 2:

• Risk Analysis with Risk 2 occurred:
  • Risk costs applying expected monetary value (e.g., 20% x $6,000)
  • Subtract full impact of occurred risk (Risk 2: -$4,000)
• Contingency Reserve Calculation: $7,500 - $4,000 = $3,500

Example 3:

• Table Given:
  • Sum of threats' impacts: $4,000 + $6,000 + $8,000 + $4,000 = $22,000
• Contingency Reserve Calculation: $22,000

Example 4:

• Risk Analysis with Changed Probability (Risk C 30%)
  • Impact: $40,000 * 30% = $12,000
• Total Contingency Reserves: $4,000 + $6,000 + $12,000 + $4,000 = $26,000*

Example 5:

• Risk Outdated (Risk A)
  • Initial reserve calculation: 3.3 days
  • Subtract reserve for outdated risk: final reserve = 2.3 days