Glossary term
Contingency Reserve
Subject: Risk Management, Strategic and Systemic Risk
A contingency reserve is money, time or other resource set aside in a budget or plan to cover identified risks that may occur, and released or used as those risks play out.
Explanation
It is used chiefly in project and programme management. After risks are identified and analysed, the manager estimates the cost or delay each could cause, weights it by likelihood and adds the total to the budget or schedule. If there is a 30% chance of rework costing 200, for instance, 60 is reserved. The project manager controls the reserve, draws it down when a named risk occurs and releases it if the risk passes. Use is tracked and reported, and topping it up needs approval. A management reserve is a separate pot held above the project for unknown or unforeseen events and needs senior approval. The contingency shrinks as the project clears its risk points. Sponsors ask to see the reserve balance at each review; a reserve spent early signals that risks are materialising faster than planned.
Example
A contractor prices a warehouse build at a base cost of 1,000. Its register shows a 30% chance of ground problems costing 200 and a 20% chance of a steel delay costing 100. It adds a contingency reserve of 80 to the budget, spends 60 when the ground problem appears and reports the remaining 20 to the sponsor.
Not to be confused with
- Management Reserve
- A management reserve covers unknown, unforeseen events and sits with senior management; a contingency reserve covers identified risks and is controlled by the project manager.