TOPIC: Contingency Reserve & Contingency Plan

Hello, can anyone help me with this question?

You have finished the Plan Risk Responses process and are left with Residual Risks. What should you do with them?

I was stuck between these two options:

(A) Document them in the Risk Register
( Include them as part of the Contingency Plans

I selected B according to the source, A is the correct option. Can we not setup Contingency Plans for Residual Risks? If so what is the purpose of the Contingency Plan? How is different from a Contingency Reserve?

Would appreciate it if you could explain this in detail. I cant wrap my head around Contingency Reserve and Contingency Plan.

Thanks
Abhinav

Dear Abhinav:

That is a great question. The concept of “contingency plan” was a bit ambiguous in the PMBOK4 and the PMBOK5 has further clarified this. Let me share what PMBOK4 and PMBOK5 say about contingency plans:

PMBOK4: The unknown risks, that is the risks that exist but the organization is not aware of, cannot be managed (as they are unknown to the organization). However since the unknown risks exist, a contingency of fallback plan should be in place to handle a situation when an unknown risk occurs. For example due to any reason if the project scope of work changes requiring additional resources we will trigger this “Plan B”.

PMBOK5: The 5th edition clarifies this concept. The PMBOK5 accepts that contingency plans can also be established for known risks. For some risks it is more appropriate to have a contingency plan in place rather than proactively managing them by mitigating, transferring or avoiding. For example if we know that there is a risk that the project scope of work might get changed as a result of a new government regulation that might require additional resources. If this risk, new government regulation impacting the project scope, is known, but the probability of the risk is so low that we do not want to avoid, mitigate or transfer, in this case, rather than accepting the risk, we might create a contingency plan for the risk. However, for a contingency plan, we need to determine and document the conditions that would trigger the contingency plan. I would say this is sort of passive risk management.

Now, coming to your question, if you have finished the Plan Risk Responses process, this means that you have either avoided, mitigated, transferred or accepted all of the known project risks (for PMBOK5 you might have also developed contingency plans for some of the known risks as well). At this stage the residual risks are all those risks that are either still “unknown” or have been deliberately accepted.

So now the Plan Risk Responses process has been completed and we still have residual risks. What shall we do with them? We need to regularly review the project risks during the Monitor and Control Risks process throughout the life of the project. Whenever we will get any additional information we will update the risks register. So practically speaking the choice A will hold in any case.

Regarding the choice B, it will still hold for the “unknown” risks as we do create a contingency plan for the unknown risks. However, the residual risk also include the deliberately accepted risks hence we might not have a contingency plan for the accepted risk. Hence choice A will hold in any case. On the other hand, choice B, which is very appealing as the right answer, will only hold for the unknown risks and not for the deliberately accepted risks.

I must say this is a tricky question. If this question have been presented to me, my initial response would have been the same as yours. Please do share the full question along with the explanation and the source so that we can further analyze this question.

Regards,

Khurram

Hi Khurram,

Thanks for the detailed response. I came across this question in PM Fastrack. The explanation simply states that all remaining risks that you have decided not to do something about must be documented and revisited later. After reading your response and the PMBOK4 guide, here is what I have come to understand:

After Plan Risk Response, you are left with residual risks i.e. known unknowns. Contingency plans may be developed for SOME of these residual risks (aka active acceptance), while the rest may be dealt with as and when they occur (aka passive acceptance). However, ALL residual risks must be documented as such in the risk register and revisited later during Monitoring & Controlling. Keeping this in mind option (A) is definitely true, but option ( may or may not be true. Hence, I think PM Fastrack may be correct.

Going back to my original question, I had also asked you what is a Contingency Reserve. If I understand correctly, Contingency Reserve is a type of Contingency Plan i.e. it is a time or cost reserve set aside for known risks that the management has decided to accept. Page 304 of the PMBOK4 guide confirms this: "The most common active acceptance strategy is to establish a contingency reserve, including amounts of time, money, or resources to handle the risks."

On the other hand, a Management Reserve is purely meant for unknown unknowns. The differences between all these terms are very subtle and tricky!

Please correct me if I am wrong.

Dear Abhinav:

Yes, your interpretation to my explanation is correct. Option B does look very appealing as the right choice but option A will be true for all residual risks, i.e., accepted risks plus the unknowns.

Coming to your second question, you can think of a contingency plan as an action-plan or procedures or activities that need to be carried out once a risk is triggered or the symptoms are visible. It can be a detailed or broadly framed plan. Further the level of detail can vary with the significance of the risks being planned for. However in order to carry out the plan, in case the risk is triggered or the symptoms are visible, you need to have financial and schedule reserves. You can think of the contingency reserves as the “dollars” or “days” available to the project manager to carry out the contingency plan. If a contingency plan exists, then the contingency reserves will be a part of it.

For the management reserves, yes you are right; these are for handling the unknown risks and are under the direct control of the executive management.

Regards,

Khurram