One of the other important estimation tools and techniques is called Reserve Analysis. Just like the other Tools and Techniques of this section, even Reserve Analysis is used in both Schedule as well as Cost estimation.
Why do we need Reserve Analysis?
No matter how good you are at planning, there is always a risk of something slipping through the cracks. To counter this, we use two types of reserves specifically for risks that remain after the risk management activities are complete.
There are risks that just cannot be mitigated or transferred and you must ‘live’ with them. The best that can be done is to have certain reserves for them just in case they materialize. That right there is the very objective of Reserve Analysis – accommodating risks and minimizing their impact by allotting reserves
Types of Reserves
Typically, there are two types of reserves,
Basically time reserves or buffers (known-unknowns). In a software project, if a software engineer is estimating a module development activity as 5 days, but stating that it might take up to 8 days due to risks, extra 3 days here is contingency reserve.
From the perspective of Cost Management, it should be noted that Contingency reserve is part of the Project Budget itself and the Project Manager has decision making authority on using it.
2. Management reserve
Basically fund reserves or extra funds (unknown-unknowns). Extra funds are reserved by management for unforeseen risks. Note that the fund is with management, not the project team, and the management decides when to release the funds. Management reserve is also not part of the Project Budget
In a construction project, estimations show that digging the ground for foundation work will cost around $200,000. But due to the geological area of the project, you might hit big rocks and that would shoot up the cost to $250,000. The extra $50,000 will be accommodated by your management reserve.
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