Unused contingency

For projects run as part of a program or portfolio, the management reserve is often a single pot of cash set aside to cover all of the projects in the group.

This general allocation decouples management reserves from individual projects, giving executives greater flexibility in responding to problems, especially across diverse projects with varied risks.

So, to return to the example of digging a trench, suppose once the task begins, we dig through sand for half the length of the trench, but rock for the rest. 

In that case, the project manager can authorize the team member responsible to spend $2,500 from the $5,000 contingency to meet the additional anticipated cost.

Let’s say, though, that the digger had a mechanical failure and took two days to repair at an additional cost to the project of $1,750. 

Can we use the $2,500 balance of our contingency to pay for that?

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Determining total reserves

The answer is no! 

The contingency of $5,000 was specifically linked to the need to dig through rock.

Even though only $2,500 was spent, the remaining $2,500 cannot be used for any other purpose – it is returned to and retained by the performing organization.

We can, however, apply to the sponsor or PMO to draw down $2,500 of the general management reserve to meet the unanticipated expense of repairs.

As a final note, fixing a project or program’s total reserves at (for example) 10% of the program’s budget without regard for the specific circumstances and context of each project is risky business in itself.

It may well be that the cost of managing and treating risk is much greater than the rewards intended by the program.

In that case, you should reconsider the business case for the program with a full accounting of the cost of risk management, ensuring that the assumptions that went into the analysis of costs and benefits remain intact and that the program and its outcomes can still be justified.