Question.3143 - Post 5.1 Recall “management reserve” from the Module Five lecture document. A management reserve is for unidentified risks. Discuss three such risks, and explain how you would deal with them when they are realized. Also, discuss why the project cost baseline typically does not include the management reserve. Post 5.2 If cost variance is negative, discuss how you would get the project back on budget. Would you compromise on the scope? And/or on the schedule? And/or on something else? Discuss with reasoning
Answer Below:
Management reserve Management reserve refers to any unforeseen, unpredictable or unanticipated work, circumstances and events encountered by a project. The reserves created for management reserve assist in the mitigation of risks and impact associated with the unforeseen events. Unanticipated natural disaster- The first example of such risk can be unanticipated natural disaster like earthquake or floods similar to the massive earthquake in Japan in 2011. Such disasters create extra costs impact on project management and leads to project delays which escalates costs even further. Unforeseen task - Another example of risk is generation of some unforeseen task which was not incorporated in the initial planning phase. The implementation of these new tasks requires further rescheduling and resource allocation. This can be in the form extra painting work that was not incorporated in the initial planning phase as it was later found that car parking required repair work. Significant adjustment in labor or overhead rates – Any significant change in labor rates which had no chance of being predicted or increase in any overhead rates requires extra resource allocation. These are few examples of in which management reserve is required. Dealing with these risks-These risks can be mitigated and dealt by proper planning and resource allocation. Proper and adequate resource allocation is necessary to ensure that these risks are dealt with in proper manner. Resource allocation provide a manner in which these risks can be covered in the event of any unforeseen event that might escalate costs of the project. Project cost line – The project cost line ordinarily does not include the management reserve provisions as the project management is not provided adequate control over these provisions made for management. He cannot use the money in the ordinary circumstances and would have to apply to the senior management for receiving the resources marked for management reserve. References Humphreys.com (n.d). EVMS Education Center The Effective Use of Management Reserve. Retrieved from http://www.humphreys-assoc.com/evms/effective-management-reserve-ta-a- 60.html Grabham, A. (2013). Thoughts on 'Understanding risk contingency and management reserve’. Retrieved from http://www.apm.org.uk/news/thoughts-understanding-risk-contingency-and- management-reserve Negative cost variance Negative cost variance provides a look that project has expended more than the budgeted costs. A project looking at negative cost variance has a number of options to get back on the budgeted limits. Inefficiencies identification: Firstly, the project manager should ascertain inefficiencies in the project and work for elimination of the same. Deficiencies of budget: Next, estimates for project should be revisited to check for any deficiencies in the estimation of the budgeted costs. Often, incorrect estimation of budget leads to negative variance. High cost budget heads: Another option could be to identify heads which have high budgeted costs and plan to reduce actual costs incurred on these heads. In case the negative cost variance persists, the project manager should attempt all available options to curtail costs without compromising the scope or quality. However, he can look for ways for innovation to save costs without reduction in scope. This can be in the form of innovation of a newer technique of construction which saves time, material, overhead rates and labor costs. But, if nothing works the project manager has to reduce the scope of the work or increase the budget in consultation with the sponsor. References Gido, J., & Clements, J. (2012). Successful Project Management. Cengage Learning. Schwalbe, K. (2010). Information Technology Project Management. Cengage Learning.More Articles From Operation Management
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