Establishing Adequate Reserve

Establishing Adequate Reserve

Program managers must lead in an environment of uncertainty. Risk management processes provide structure to handle this uncertainty. The uncertainty by itself is challenging enough, but if it is not handled with consistent methods, it escalates. Therefore, the program manager needs to create a proactive and positive culture when it comes to risk management.

This 6 part Guide to Program Risk Management will help you identify risks and walk you through the process to assess impact and involve stakeholders.

Part 1 of 6: The Program Manager’s Risk Environment
Part 2 of 6: Risk Statements
Part 3 of 6: Likelihood Scales
Part 4 of 6: Establishing Adequate Reserve
Part 5 of 6: Risk Attitudes
Part 6 of 6: Be Success Oriented

Part 4 of 6: Establishing Adequate Reserve

One of the program manager’s responsibilities is to establish adequate amounts of reserve to handle risks. The way the amount of reserve is established may vary from using expected value to just taking a percentage of the overall program budget for projects. Whatever percentage you use, make sure it’s established on the basis of the organization’s history of project overruns and by factoring in the expected value of the risk events for the project. The program manager needs to be cognizant of the biggest risks in a program because in the real world of program and project management we get outcomes, not averages. The amount of reserve determined should factor in what would be done if for some reason a few major risks materialized.

It is then up to the program manager to sell the reserve amount in the budget process to ensure allocation to the program. Thus, in choosing and developing risk management tools, give consideration to how those tools can be used to bolster the credibility of the rationale used to justify the reserve amount. This is another reason for having adequate data on the program’s previous performance and the project implementation success rate.

Once a reserve amount has been established for the program, the program manager must decide who will have access to this information. In some organizations it is public knowledge; in others it is a closely guarded secret. However, when program reserves are inadequate or nonexistent, the program manager must be prepared to rob other projects within the program if necessary. Nothing comes for free.

A number of organizations build risk impacts (schedule and cost) into the project or program baseline for risks with a high likelihood of occurrence. They make the assumption that these risks will occur, and this is an effective way of adding reserve to the project. A client has had success with funding as a part of the project baselines, with every risk having a likelihood greater than 75 percent. These risks are obviously scrutinized in detail, and the policy has served the company well in stabilizing budgets and customer expectations. If the risk doesn’t materialize, the funding is reallocated from the project back to the program.

Once your team has decided on their plan and process, PPM software can help you execute that process. WorkOtter helps you successfully execute your program process strategy for project success. Get a demo of WorkOtter and see how we can make your program management effective.

“The Handbook of Program Management: How to Facilitate Project Success with Optimal Program Management, Second Edition” by James T. Brown is a copyrighted work of McGraw-Hill and McGraw-Hill reserves all rights in and to the Content. ©2014 by McGraw-Hill Education. Purchase the book on Amazon.

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