How do you allocate contingency funds and reserves for unexpected events or changes in the project scope?

Difference between Contingency and Reserves are; ?Contingency reserves are set aside to implement a risk response or to respond to risk events should they occur. They are included in the project budget to allow for uncertainty and are managed by the project manager. ?Management reserves, on the other hand, are set aside for unexpected activities related to in-scope work. They are not included in the budget and are managed by the project sponsor, product owner, or the PMO at the program and portfolio level. In summary, contingency reserves are included in the project budget to allow for uncertainty and are managed by the project manager, while management reserves are not included in the project budget and are managed by higher-level.

In my experience, I've learned that effective project management involves a delicate balance between being prepared for expected challenges (contingency funds) and having a safety net for the unexpected (reserves). It's like having both an umbrella for a rainy day and a financial cushion for when life throws surprises at us. Communicating this distinction clearly to our team and stakeholders builds trust and ensures smoother project execution.

Contingency funds to me are more a factor of project conditions and degree of funds spent in design. As an example, say that you know expansive soils are present beneath an industrial building floor slab being replaced, but exactly where and how large the pockets of these unsuitable soils are remains an unknown. You can establish an estimate for bid purposes, but if miss the mark, you're going to need a means of field address to avoid stoppage on the project. It's not fair to try passing buck for this to your contractor, when you failed to expend the funds necessary for more advanced testing by engineers to establish extent of bad soils while in design. So, a contingency for soil replacement may account for this to keep project flowing.

??The level of risk associated with the project can influence the amount of contingency funds and reserves that are set aside. The higher the risk, the more contingency and reserves may be required. ??The accuracy of the project estimation can also influence the amount of contingency funds and reserves that are set aside. If the project estimation is not accurate, more contingency and reserves may be required. ??The level of detail in the scope definition can also influence the amount of contingency and reserves that are set aside. If the scope definition is not detailed enough, more contingency and reserves may be required. ??If the quality of budget planning is not thorough enough, more contingency funds and reserves may be required.

Big fan of using a risk register. Log risks and potential mitigation. You can add to the contingency fund where risks are high with limited options for mitigation. Red risks might lead to a greater requirement for contingency whilst Amber/green risks would require a lower degree of contingency. The added benefit is that the focus on risk mitigation should mean that less contingency is ultimately required. The risk register should be reviewed regularly with appropriate attendees together with action progress.

Through years of hands-on experience, I've learned that contingency funds and reserves are the backbone of project resilience. It's paramount to calculate the right amount, tailored to each project's unique characteristics. Transparent communication and robust change management processes are fundamental. My journey has underscored the importance of vigilant monitoring, proactive risk mitigation, and unwavering accountability. I've discovered that learning from past projects, steering clear of common pitfalls, and prioritizing stakeholder satisfaction are essential in the effective utilization of these funds.

??Project leaders should assess what level of spending authority they have over contingency funds. A tiered approach can help ensure the money is available and accessible, and that it is spent appropriately ??Determine whether the organization is willing to allow access to management reserves. These funds aren’t tied to a specific project’s risk register and are intended to cover emergencies across the portfolio ??Should learn from past projects and adjust their contingency funds and reserves accordingly ??Contingency should be clearly identified in the cost documentation ??Resource optimization is used to adjust the start and finish dates of activities to adjust planned resource use to be equal to or less than resource availability

In our experience in local government budgets we recommend a percent of total budget reserve to be planned to be unspent. We call these flexible budget line items or appropriations. We think a 1%~ amount based on anticipated revenues is a good place to start. Reality is budgeting is hard and unplanned items come up and revenues miss projections. Using a flexible budget provides systematic budget control without amendment to the adopted budget. In a good year, the funds can be allocated mid-year to the next highest strategic priority. In periods of revenue shortfalls the line can just revert to the fund balance.

Regarding project reserves, we made it a habit not to really have or use them. Instead, we tried to ensure clear articulation of the needs of project in advance and to illustrate these in the construction docs assembled by design team. Of course, we all know that customers are notorious for saying "we didn't know it was going to be built this way, or we sure could use more space, or we'd really like for finishes to be a bit nicer," etc., etc. These types of changes were recognized by management as being a means of "scope creep," which busts a budget more than anything else. So, how we handled this was to throw payment responsibility for such changes back on offices from their own budgets vs. having funds to cover them in capital budget.

It can be valuable to have not only an established method for using contingency funds and reserves, but also an established governance process that takes advantage of multiple stakeholders’ expertise and authority in relation to the project. This can help ensure stakeholder satisfaction and further mitigate risk.

Factors to consider when allocating a contingency funds: Risk Assessment: Evaluate potential risks and their financial impact on your business. Business Size and Complexity: Consider the scale and intricacies of your operations. Cash Flow Analysis: Understand your regular cash inflows and outflows. Industry Volatility: Account for sector-specific risks and market fluctuations. Legal and Regulatory Requirements: Factor in potential legal or compliance-related financial needs. Historical Data Review: Use past emergencies to gauge future contingency requirements. Liquidity Needs: Ensure funds are readily accessible without significant penalties. Review and Update Regularly: Adjust the contingency fund as your business evolves.

Na contabilidade societária as reservas s?o regulamentadas por legisla??o local e invariavelmente submetidas a controle e fiscaliza??o do Conselho de Administra??o para delibera??o quanto a sua destina??o e origem. De forma similar, é altamente recomendado que o mesmo critério seja utilizado em um processo or?amentário, ou seja, no ambito da aprova??o, pelo Conselho, do or?amento para determinado período, recomenda-se também aprovar a origem e destina??o das reservas que est?o sendo incluídas no or?amento.

Another option to budgeting these sorts of things in individual PROJECT budgets is to budget them astraddle of an entire PROGRAM consisting of multiple projects. We found this to be a much cheaper way to the organization to conduct business vs. seeing contingencies and reserves calculated, placed in the many different layers of cost estimates and essentially compounded & enlarged as a direct result. Plus, a common set of questions we'd seen asked during bid releases was "what's your budget and what's the project contingency?" So, one day I just responded "it's a dollar more than your bid and there is NO CONTINGENCY." I think we then received the closet bid I've ever received and finished the job without so much as a single change order!

1. Risk Assessment. 2. Contingency Percentage: Decide on a percentage (5-15%) of the project budget. 3. Categorize Risks: Prioritize risks by impact and allocate accordingly. 4. Align with Phases: Distribute contingency based on project phases. 5. Collaborate with Stakeholders:Involve team members for diverse insights. 6. Document Assumptions: Clearly document criteria and assumptions. 7. Release Criteria: Define guidelines for accessing contingency funds. 8. Regular Review: Continuously review and adjust contingency plans. 9. Communication Plan: Communicate purpose and usage guidelines. 10. Monitor Risk Triggers: Establish triggers for risk materialization. 11. Track Usage: Monitor actual usage and learn for future improvements.