According to the PMBOK® Guide, specifically within the Estimate Costs and Determine Budget processes, Reserve Analysis is the dedicated tool and technique used to account for cost uncertainty by establishing financial buffers.
Reserve analysis distinguishes between two types of " contingencies " or reserves based on the level of uncertainty:
Contingency Reserves: These are associated with " Known-Unknowns. " These are identified risks for which a response has been planned. The contingency reserve is included in the Cost Baseline to account for the uncertainty of these risks.
Management Reserves: These are associated with " Unknown-Unknowns. " These are for unforeseen work that is within the scope of the project. These are part of the Project Budget but are not part of the Cost Baseline.
By performing reserve analysis, the project manager ensures that the project has enough funding to handle risks and uncertainties without constantly needing to request new budget approvals.
A. Vendor bid analysis: This technique involves analyzing what the project should cost based on the responsive bids from qualified vendors. While it helps in estimating, it does not specifically deal with the creation of contingency buffers for internal project uncertainties.
B. Three-point estimates: This technique (using Optimistic, Pessimistic, and Most Likely values) helps calculate an expected cost or duration by considering uncertainty. While it identifies the range of uncertainty, it is the input used to determine the size of the reserve, rather than the technique of managing the reserves themselves.
C. Parametric estimating: This uses a mathematical model (e.g., cost per square foot) to calculate costs. It is a highly accurate way to estimate based on historical data but does not inherently include contingency for unique project risks.
Activity Cost Estimates + Contingency Reserves = Work Package Estimates.
Work Package Estimates + Contingency Reserves = Control Accounts.
Control Accounts = Cost Baseline.
Cost Baseline + Management Reserves = Project Budget.
