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While preparing the estimate of a project , some allocation will be provided for meeting certain unforeseen items which may have to be incurred for the successful completion of the project. The allocation depends on ones expertise in accurately preparing the activity schedule. Such allocation also include the provision for meeting certain expenses that may have to incur to meet happenings due to the Acts of God such as natural calamities etc. Such reserves are called contingency reserve which help to hedge the risks. Management reserves are the allocation to meet the managerial expenses other than salary and perks associated with managing the project , but for certain items like public relations associated with the project Etc.
The Contingency reserves are known/unknown while the Management reserves are unknown/unknown.
The way the project is budgeted:
1. cost of estimations of material + resources + tasks
2. add contingency reserves to cover known risks.
The sum of the two steps above then called project budget. The project manager has access to the whole budget including the contingency reserves.
The sponsor then adds management reserves to cover unkown risks. The project management does not have access to the management reserves (and sometimes does not know the amount) and it is not included in the project budget
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Contingency reserve That means you’ve already identified the risk; you just don’t know how much it will impact your project. This can be estimated based on the sum of all of your risks’ expected values.
Management reserve Basically, you didn’t even identify the risk until it has occurred. This may be derived from using percentage of the overall project budget.
