Article #521 Avoiding the Misuse of Budget Contingency Reserve on Capital Construction Projects by Enforcing the Best Practices of Transparency and Accountability While Unlocking Trapped Budget Reserve

Every capital construction project has risks that may affect the cost, schedule or quality of the completed work. The likelihood of these risks must be assessed so their typical cost can be calculated. The result is the contingency reserve also called known-unknown risks. Typically, a 5-10% calculation of the construction budget should be allocated to contingency reserve. Project managers might be authorized to use the contingency reserve, depending on the Delegation of Authority (DoA) matrix which sets out who can approve a change, subject to cost limits, or areas of responsibility.

Nevertheless, the current practices to manage contingency reserve as well as management reserve for unknown-unknown risks, can be improved to avoid the misuse of those reserves as well as reduce the amount of budget amounts trapped in those reserves. To achieve this, there should be standardization for the impacted business processes of risk identification and assessment, develop cost estimate, establish baseline budget, managing budget transfers and aligning changes with contingency reserve. In addition, there is a requirement to manage all those business processes across the organization’s complete projects’ portfolio.

This requires using a Project Management Information System (PMIS) like PMWeb for which all projects will be captured on the same platform as well as the management of the required business processes. To start with, the contingency reserve should be detailed to the level that will provide the required control. For example, it can be broken down to reserves associated with project design, construction, owner requirement, weather conditions, etc. This level of detail will be reflected in the cost breakdown structure (CBS) under the level “Contingency Reserve”. A similar approach can be also done for “Management Reserve” if it possible.

The next step is to build the business process for identifying, analyze and selecting risk response for which it will be the basis for determining the Contingency Reserve. PMWeb custom form builder will be used to create the risk template for which it will have three important fields for the risk breakdown structure (RBS) level, risk name and cost breakdown structure (CBS) level. The RBS and risk name fields are needed to enable having enterprise risk reporting whereas the CBS level is needed to understand the type of the estimated contingency reserve associated with the risk.

Regardless if the cost estimate was created using PMWeb cost estimate or imported from any third-party application, the project cost estimate including the allowances for the contingency reserve as well as the management reserve. Those allowances will be detailed to the cost breakdown structure (CBS) levels they are associated with.

The approved cost estimate will become the basis for generating the project budget. Different budget versions can be created as the quality of the project cost estimate improves during the design development stages. Nevertheless, only a single baseline budget can be approved and all other versions need to be withdrawn. The generated budget will automatically detail the contingency reserve and management reserve to their relevant CBS levels.

The next step is to transfer all budget amounts allocated for contingency reserve and management reserve at each project level to the budget of the project titled “Risk Reserve Management”. This budget will include the contingency reserve and management reserve amounts of all projects managed by the organization. In other words, there will be no more trapped budgets for any type of reserve on any project that is managed by the organization. PMWeb budget request will be used to manage this process for which transfers between different projects should be enabled.

The same budget request business process will be also used to transfer funds back from the “Risk Reserve Management” project to any other project where there is a need to consume funds from the contingency reserve or even the management reserve.

The “Risk Reserve Management” project will be managed by the organization’s risk management team who are responsible for the overall implementation and management risks and associated reserves across the organization’s complete portfolio of projects. Accordingly, access to this project will be restricted to only authorized users. The budget module of the “Risk Reserve Management” project will have zero value as the only values that this project will have the amounts of reserves transferred from all projects which will be adjusted by the amounts released for approved change orders.

This will enable the risk management team to analyze and report on the sources of transfers received as well as issued. For example, a report will be created to detail all contingency reserve cost breakdown structures (CBS) levels showing the original budget amounts as “Zero” and then detail all transfers made to date to display the current master Contingency Reserve and Management Reserve budget.

PMWeb change event module will be used to align the change orders associated with each budget transfer used to consume funds allocated to contingency reserve or management reserve. The template will detail all approved change orders generated using PMWeb commitment change order module as well as the budget transfer from the project contingency reserve to the project CBS levels affected by the change. This enforces transparency on why there was need to consume funds from either the project’s contingency reserve or management reserve.

Most of the time, transactions associated with the business processes detailed above require to be attached with documents that supports what being transmitted. The attachment tab for each business process will be used to attach all those supportive documents. It is also highly recommended to add comments to each attached document to provide better understanding of what was the document for. The attachment tab also allows the user to link other records for business processes implemented in PMWeb as well as associate URL hyperlinks with websites or documents that are not stored in PMWeb document management repository.

To enforce accountability for the transactions of each business process detailed above, PMWeb workflow module will be used to create a workflow to formalize the review and approval tasks of those business processes. The workflow will map the sequence of the review and approval tasks along with the role or user assigned to the task, duration allotted for the tasks, rules for returning or resubmitting a document and available for each task. In addition, the workflow could be designed to include conditions to enforce the authority approval levels as defined in the Delegation of Authority (DoA) matrix. It should be noted that those will who be involved in those workflows could include other members of the organization that are not part of the project management team.

When a transaction is initiated for any of those business processes, the workflow tab available on each template will capture the planned review and approve workflow tasks for each transaction as well as the actual history of those review and approval tasks. PMWeb will capture the actual action data and time, done by who, action taken, comments made and whether team input was requested.

About the Authorfounder

Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with 40-year service record providing project management, project controls services and project management information system to over than 200 projects with a total value in excess of US $100 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment, Hospitality and shopping malls, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development.

Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 40 years he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe and South America. He has written more than 500 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the Association for the Advancement of Cost Engineering (AACE) and Green Project Management (GPM).

Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.


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