due to the importance of the contingency reserve calculations in the PMI rmp exam I'm dedicating this lecture with a lot of examples covering the majority of ideas that you will see in your real exam so a reserve can be defined as the amount of time and or host added to the project to account for risks okay the amount of time usually in days or in dollars is either in schedule or in budget okay to deal with the project risks and there are two types of reserves the first one is the contingency reserves to deal with known unknowns like the residual risks the risks we identified earlier and we accepted as part of the plant risk responses we will deal with them once they occur in the project with the contingency reserves management reserves to deal with unknown unknowns like risks that have not been identified so contingency reserves you will deal with the pre identified risks while management reserves to deal with risks that we did not expect and we did not identify earlier the management Reserve is usually a percentage of the total project cost or duration and it falls between 2 and 15 percent so there is no mathematical method in order to determine the management reserve of your project but there is a man a mathematical method using the expected monetary value in order to exactly determine the required contingency reserves and thus what I am going to explain in this lecture when calculating contingency reserve threats are going to add to the reserve amount while opportunities were reduced keep this in mind it's the opposite of the expected monetary value used okay while we are determining the expected monetary value for a project we will give a negative sign for a threat and a positive sign for the opportunity however while you are determining the reserves for the project you will give a negative sign for the opportunity as the opportunity will reduce the needed reserve and you will give a positive sign for the threat as it will add to the needed result contingency reserves are the finance for the project cost estimates by the project manager to deal with uncertain events or risks that may happen known unknowns it's assigned or the contingency reserve is assigned for activities work packages or a project you can assign the reserve even on a project level or on a work package level or even on an activity level now it's very important to understand that the cost Baseline includes the contingency reserve so what is a project cost Baseline it's the cost of the project activities plus the contingency reserve needed for the project so the management Reserve is not part of the coast Baseline the management Reserve is part of the overall project budget so what's the difference between the project budget and the cost Baseline it's the management reserve and the same applies for the schedule Baseline the schedule Baseline is the critical path plus the contingency reserve while the project schedule is the schedule Baseline plus the management Reserve so keep in mind that the management Reserve is not part of the Baseline now imagine that you are determining or you are calculating the required costs for all the project activities and you did for Activity 1 200 or 100 US dollars Activity 2 200 US dollars Activity 3 200 US dollars and so on the next step is to do the sum up okay and do it on a work package level these are the work breakdown structure levels so you have the activity level then the work package level then you have the control account level okay then you can have the project estimates which is the sum of the cost of all the control accounts in the project these three are levels in the word breakdown structure now the project estimates is here you will add the contingency reserves to the project estimate and you will have the cost Baseline then you will add the management reserve and you will have the overall cost budget of your project so the difference between the cost budget or the project budget and the cost Baseline as the management Reserves example number one you are planning the manufacture of a new product your estimates result in a net cost of 195 000 US Dollars and 200 days of duration your risk analysis come up with the following you have five risks the first one there is twenty percent probability of delay in the delivery of final product resulting in 30 days DeLay So This is a threat probability and impact are given the second risk there is 10 percent probability that raw material will be available before expected saving 20 days this is an opportunity there is 15 probability of designed effects resulting in 80 Days delay this is a threat there is 30 percent probability that resources are not professional enough in this type of projects resulting in 100 days delay this is a threat and finally there is a probability of 25 percent that the design might be simpler than expected saving 40 days so we have another opportunity we have three threats and two opportunities what is the required contingency reserve simply use the expected monetary value formula and determine the expected monetary value of each risk multiply the probability by impact give a negative sign for the opportunities and a positive sign for the threats and do the sum by applying the expected monetary value formula for risk 1 it is 6 days for risk to its two days for risk 3 12 days 30 days for risk 4 and 10 days for risk 5. to sow the reserve required for the project will be 6 minus 2 as the two days refers to the opportunity plus 12 plus 3 minus 10 days for the second opportunity you will need 9 days as a contingency reserve for your products example number two given the table below what are the contingency reserves considering that risk 2 occurred so this is the keyword of the question determining the contingency reserve based on the given table it's very simple you just need to multiply the probability by the impact and do the sum all of them are threats so you will just do the sum now the keyword or the trick of the question is that risk to occurred so if Risk 2 occurred what does that mean it means that you need to remove the impact of the risk from the contingency Reserves why because when a risk occur the whole impact will be consumed not only its expected monetary value Risk 2 occurred means that the probability is hundred percent it's not ten percent anymore it's hundred percent so the expected monetary value of the risk is four thousand US dollars right okay so you need to remove four thousand US dollars from the reserves so twenty percent by six thousand US dollars plus ten percent by four thousand plus twenty five percent by ten thousand plus twenty percent by seven thousand plus ten percent by Twenty Thousand will give you seven thousand five hundred US Dollars this is the reserve of your project now as Risk 2 occurred you need to remove risk to impact which is four thousand US dollars so the remaining reserves will be three thousand five hundred US dollars keep in mind that the ferrisco cord you need to remove its impact and not only adds Reserves example number three given the table below what are the contingency reserves needed for the project it's a very simple question four risks are given in the table the impact is given for each and the reserves as well as given for each all of them are threats so you just need to sum the four thousand to the six to the a to the 4 and you will have the needed reserves which is 22 000 US dollars example number four given the table below what are the contingency reserves needed for the project Frisk C probability became thirty percent so we have the same table the only new information that the probability of risk c is now 30 percent so we have the impact of risk C right which is 40 000 US Dollars you want to find out the new contingency reserve of risk C based on the new probability and do the sum so for risk C the reserves will be 40 000 US Dollars the impact by 30 percent 12 000 US dollars so the new contingency reserves will be 4 plus 6 plus 12 plus 4 26 K thousand US dollars the last example given the table below what are the contingency reserves of the for the project if risk a is outdated so we have this table and the information given as that risk D is outdated first determine the total reserves which is the probability by the impact for each risk given that risk C is an opportunity why because it will save you 10 days so by doing the simple math probability by impact for each risk giving a negative sign for risk C you will have 3.3 days if risk a is outdated you need to remove the reserve of this risk not the impact because this risk did not occur this risk only was outdated you are planning for this risk in the winter and you are in the summer now so it will never happen Okay so you just remove remove the reserve of this risk and the remaining reserves will be 2.3 days a faresk is outdated remove Association Associated reserves with the risk and not its impact