How Project Managers Need to Deal with Risk Reserves

During this time of economic crisis it has become much more important to review risks and contingency plans. More than ever I hear of organizations developing risk plans. In the fourth edition of the PMBOK, risk is the largest section of the nine knowledge areas.

Many companies that were risk takers are now becoming risk adverse. As a result we have seen more projects cut resulting in massive lay-offs, high unemployment rates and companies writing off millions in bad debt. This has created a much different landscape in the area of risk management for many project managers. Admittedly there have been several industries; financial, avionics, healthcare, etc.; that have always paid close attention to risk. However most companies involved in non-financial or non-life threatening activities certainly gave a much lower priority to risk management in the past.

When the economy was peaking and companies were thriving most companies did not take adequate time to review risk. At the time they were too busy trying to find the resources to support the hundreds or thousands of projects that they had running. They did not want to waste the time of these valuable resources reviewing risk. As a result many project continued to execute despite the fact that they were doomed to fail financially or would never even deliver the product or service intended. Vampire-like projects lived on long beyond their years surviving on the rich blood of the company.

Today project managers have much more experience with risk management. The piece that may be missing is the connection of risk with contingency funding. There are simple formulae to calculate contingency needs once risk is defined in terms of financial impact. The hard part is often determining that financial impact. To put this in to project management terms this contingency funding can be thought of in terms of reserves. These reserves should be planned into every project.

While we are getting better at delivering near to our budgets, most projects still tend to spend over the original budget. This spending is the result of risk events that take place during a project. These happen on almost every project whether we plan for them or not. Too often we try to fool ourselves into thinking that we have done such a good job planning that there is nothing that will put us over budget. Yet projects continue to run over budget.

Rarely are planning reserves budgeted at the project level using a systematic approach. The reality, in most cases, is that the executive management team anticipates over spending and merely builds that into the larger budget or is just aware that these budget overruns may occur. For the project manager this make is more difficult to acquire these reserves for their projects and they risk, or at least fear, career advancement by asking for additional funding.

But as a project manager you should be bold and aware of how the game is being played. Let it be no secret that additional funding is always available to the most important projects. Let those executives know that what you are asking for should have been kept in reserve from the start. Take it one step farther and at the start of you project make it clear that a reserve amount should be available to the project. Everyone knows this is the reality. Don’t let them kid you.